Mortgage interest deduction: Everything you need to know

Mortgage interest tax deduction limit

The mortgage interest tax deduction limit changed in 2017 with the signing of the Tax Cuts and Jobs Act, or TCJA, which lowered the mortgage deduction limit and placed a limit on what you could educt from your home equity debt.

The mortgage interest tax deduction limit was $1 million prior to the signing of the TCJA but is now limited to $750,000. The limit means that now married couples that file jointly, and single filers, can deduct the interest on a mortgage of $750,000 for head of household, single, or joint filers. On the other hand, married taxpayers that file separately can deduct upwards of $375,000 per person.

Exceptions to the mortgage interest tax deduction limit include: mortgages taken out prior to October 13, 1987, which would be considered grandfathered debt, and therefore not limited, meaning that the interest you pay is completely deductible; homes bought between October 13, 1987 and December 16, 2017, which would still be eligible for the $1 million limit, or $500,000 each if you are married but filing separately; and homes that are sold prior to April 1, 2018, which would be eligible for the $1 million limit, but only if the property was bought prior to that date and if there was a binding contract entered prior to December 15, 2017, that closed prior to January 01, 2018.

What qualifies as deductible mortgage interest?

Different kinds of home loans qualify as a deductible mortgage interest, including loans to improve or build your house, or to purchase. Second mortgages, home equity loans, or lines of credit could also qualify for mortgage interest tax deduction, even though typical loans are for a mortgage. After you refinance your property, you could also use the mortgage interest deduction, but you will have to ensure the loan meets the qualifications—improve, build, or buy—previously listed and that the property is used to secure the loan.

Other fees and costs that may be added to the mortgage interest deduction include: any interest on your home; interest on a second home you do not rent out; late payment fees; most mortgage insurance premiums; points; prepayment penalties; and home equity loans and home equity lines of credit used to improve your home.