What are the rules that apply to deductions for interest payments on mortgages? They can get confusing.
The old rules that apply for 2017 and previous years. They allowed itemizers to deduct payments for interest on as much as $1 million of mortgage debt for a main home and a second home used as a vacation retreat.
The revised rules that apply for 2018 and later years. They decrease the mortgage-debt ceiling for new buyers. The ceiling drops from $1 million to $750,000 for married couples filing jointly and single persons, and to $375,000 for married persons filing separate returns. (There will be more in a moment regarding when some unmarried couples each get to deduct interest on up to $750,000 of debt.)
Only one bite of the apple for new buyers. They must apply the decreased ceilings to the combined total of loans used to buy, build or substantially improve a person’s main home and second home.
Adios to deductions for interest payments on home-equity loans. The new rules abolish any write-offs for interest on home-equity loans, unless the loan proceeds are used to buy, build or substantially improve the taxpayer’s home that secures the loan.. The old ones allowed deductions for interest on as much as $100,000 of such loans; they imposed no restrictions on how the borrowings could be used. It was OK to use them for, say, cars or furniture.
Payments of state and local income taxes and property taxes. The new rules also cap write-offs for such payments. The ceilings are $10,000 for couples filing jointly and single persons, dropping to $5,000 for married couples filing separately.
Happy ending for unmarried couples who buy pricey homes, remain unmarried and file separate 1040s: Each is entitled to deduct up to $10,000. The IRS couldn’t care less that that they take out one loan to purchase their dwelling. Also, they’re each able to deduct interest on as much as $750,000 of mortgage debt. The IRS isn’t censorious. The status of the relationship is immaterial.
Some pre-purchase reminders for unmarried couples who might later split: Enter into cohabitation agreements that cover what happens when they sell or otherwise dispose of their homes. What if one partner wants to leave half of the residence to the other? Well, then they both need to write wills.
Who are the individuals hardest hit by the ceilings? Those who reside in coastal states like California, Connecticut, New Jersey and New York and have resigned themselves to annual payments of state and local income taxes and property taxes that aggregate well above $10,000.
Indexing. Not by happenstance, the brackets for income taxes and the standard deduction amounts that are available to persons who opt not to itemize outlays for things like medical expenses and charitable contributions are “indexed,” meaning they’re adjusted annually to reflect any intervening inflation, whereas there’s no indexing for the ceilings on mortgage interest, state and local income taxes, and property taxes.
How long are the new rules and their ceilings supposed to be around? They apply for the years 2018 through 2025. Come 2026, they’re scheduled to go off the books and the old, no-ceiling rules return. Good luck with that, as there’ll be intervening presidential and midterm elections; lots could happen.