Financial Planning

How the New Tax Law Impacts Your Home Mortgage Interest

Couple smiling over coffee in their kitchen
 

In addition to revising individual and corporate income tax rates and brackets, the Tax Cuts and Jobs Act of 2017 also set forth changes regarding the deductibility of interest on loans secured by your primary and/or second residences. While at first blush the new IRS rules seem fairly straightforward, there are some important nuances with which homeowners should familiarize themselves.

 Key IRS Definitions

  • Home mortgage interest – any interest you pay on a loan secured by your principal or second residence
  • Home acquisition debt – debt used to buy, build or substantially improve your principal or second residence
  • Home equity (non-acquisition) debt – a loan secured using your principal or second residence and used for reasons other than buying, building or substantially improving the home
  • Substantial improvements – any improvements that add to the value of your home, prolong the home’s useful life or adapt the home to new uses
  • Qualified residence – a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking and toilet facilities (or a portion of such home, if part of the home is used as a home office or for other non-residential purposes)

4 Important Changes to Note

1. For any mortgage debt incurred after December 15, 2017, the maximum aggregate home mortgage interest deduction on principal and secondary residences is being lowered. Previously, interest was deductible on principal amounts up to $1,000,000 (single or married filing jointly) or $500,000 (married filing separately). Those limits will now be reduced to $750,000 (single or married filing jointly) or $375,000 (married filing separately).1 Keep in mind that the interest on a home equity line of credit (if used for acquisition, building or substantial improvement) may still be deductible under this provision.

2. The new tax law completely eliminates the deductibility of interest on home equity loans and lines of credit (except, as previously mentioned, when used for substantial home improvement). Previously, this interest was deductible on principal amounts up to $100,000 (single or married filing jointly) or $50,000 (married filing separately).

3. On the plus side, the phase-out on itemized deductions that used to apply to high-income earners has been repealed under the new tax code. If you previously lost the benefit of itemizing mortgage interest due to phase-outs, this deduction may be more valuable to you now.

4. Individuals who choose to refinance acquisition debt incurred on or before December 15, 2017, will be grandfathered at the old aggregate principal limits of $1,000,000 (single or married filing jointly) or $500,000 (married filing separately), to the extent that the amount of the new refinanced debt does not exceed the amount of the older debt.

Home Mortgage Interest Changes At-a-Glance

Interest Type

Prior Law

New Law (loans originated on or before 12/15/17)

New Law (loans originated after 12/15/17)

Home Mortgage Interest – Acquisition Debt

Deductible on up to $1,000,000 (single or married filing jointly) or $500,000 (married filing separately) of principal subject to phase-outs

Deductible on up to $1,000,000 (single or married filing jointly) or $500,000 (married filing separately) of principal with no phase-outs

Deductible on up to $750,000 (single or married filing jointly) or $375,000 (married filing separately) of principal with no phase-outs

Home Mortgage Interest – Home Equity (Non- Acquisition) Debt

Deductible on up to $100,000 (single or married filing jointly) or $50,000 (married filing separately) of principal

No longer deductible

No longer deductible

 

Take Action

Given these significant changes, now is an ideal time to sit down with your advisor to explore potentially beneficial debt modifications as well as new opportunities that may be available to you. In collaboration with your tax and legal advisors, we can help you:

  • Review your current debt structure. You may be able to save on interest expense by refinancing existing home equity debt with other collateralized loans.
  • Explore financing options for new mortgages in excess of $750,000. You could potentially save on interest expense by coupling a traditional mortgage with a collateralized loan.
  • Determine how the repeal of itemized deduction phase-outs may impact your tax planning and use of home mortgage debt. You now may be able to benefit from the home mortgage interest deduction.
  • Examine how best to employ home equity debt as part of your balance sheet management and overall financial strategy. Despite the home equity interest deduction repeal, home equity rates are still relatively low.

Keep in mind that most of the provisions of the new tax law are scheduled to sunset after 2025. Therefore, without any additional legislative action, these limitations and phase-outs will revert back to their previous levels starting in 2026. Additionally, the information provided here does not include formal 2018 IRS guidance, which is not yet available. Updates will be provided as received. By working in concert with your tax and legal advisors, your SunTrust advisor may be able to help mitigate any adverse tax implications and possibly take advantage of new opportunities presented by tax law changes.

Need to make changes to your financial plan?

Your SunTrust Private Wealth advisor can help.

1 Previous higher limits will be grandfathered for any mortgage debt put in place on or before December 15, 2017.

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