Understanding The Tax Benefits Of A Mortgage

As the tax filing deadline looms, many Americans continue to prepare and file their annual income taxes. The 86 million taxpayers who own their homes and have a mortgage, can take advantage of different tax deductions, including deducting their mortgage interest and the insurance premiums of any private mortgage insurance. The IRS allows taxpayers to deduct interest from two types of mortgage loans.

The first qualifying mortgage is one taken out for purchasing, building or substantially improving the taxpayer’s primary or secondary property. The interest paid on these mortgages can be deducted, although there are limits. The principal balance limit on this type of mortgage is $1 million for most taxpayers, although those who are married but are filing separately are limited to $500,000. Those limits apply to mortgages taken out before December 15, 2017. The Tax Cuts and Jobs Act (TCJA) lowered the limit for mortgages taken out after that date to a maximum of $750,000 in mortgage debt for single filers and married couples filing jointly.

The second type of mortgage is classified as home equity debt. As long as the debt is used to improve your existing home or build an addition to it, the interest on up to $750,000 of your home equity line of credit (HELOC) is also deductible. In the past, interest on HELOC debt used to pay personal living expenses like credit card bills or to consolidate other debt was also deductible, up to $100,000 of debt. The TCJA did away with this deduction.

Note that the $750,000 limit applies to your collective mortgage debt, including both your outstanding mortgage balance and any home equity debt. As Betterment Head of Tax Eric Bronnenkant puts it, “The total limit that you’re going to get would be on $750,000 of the loan value. That would also include any money that you borrow on a HELOC to buy, to build or improve. Don’t think about it as what the loan is called… Considering that the debt is secured by the property, and you’re using the funds to buy, build or improve, it doesn’t matter whether it’s from an initial purchase, or an improvement.”

It’s important to note that refinancing does not change how the IRS classifies a mortgage. It is still considered a home acquisition mortgage, with the principal balance changing from the initial amount to the new refinanced balance.

MoneyTips is happy to help you get free refinance quotes from top lenders.

Finally, the 2018 Bipartisan Budget Act allows qualified mortgage insurance premiums to also be treated as deductible interest through tax year 2017, a deduction which had previously been allowed to expire. If you are unsure about the new tax laws and your mortgage, consult with a tax professional.

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