New Tax Law Limitations on Home Ownership Benefits
Mortgage Interest Deduction on Your Principal (or Second) Residence:
Home mortgage interest and points are deductible as itemized deductions.
Home Mortgage Interest. Generally, home mortgage interest is any interest you paid on a loan secured by your home (main or second). The loan may be a first or a second mortgage. You can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren’t used to buy, build, or substantially improve your home.
Starting in 2018, there are three deductible home mortgage interest categories.
- Mortgages taken out on or before October 13, 1987 – Interest on these mortgages are fully deductible as an itemized deduction.
- Mortgages taken out after October 13, 1987 and before December 16, 2017 – Your interest deduction is limited to the interest on no more than $1,000,000 (or $500,000 for married filing separately filers) of total mortgage indebtedness.
- Mortgages taken out after December 15, 2017 – Your interest deduction is limited to the interest on $750,000 ($375,000 if married filing separately) of total mortgage indebtedness.
Tax Planning Tip #1: If available, take out a second mortgage on your rental property to paydown your principal home mortgage that is subject to the above interest limitation
Points. The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points
You generally can’t deduct the full amount of points in the year paid because they are prepaid interest. You generally deduct them ratably over the life (term) of the mortgage.
However, you can fully deduct points in the year paid if you pass the IRS’s nine tests. I have summarized and simplified them below:
- Paying points in the manner and amount you did is normal practice in your area
- You provided funds that were at least as much as the points
- The loan is to buy or build your main home.
- The points were figured as a percentage of the principal amount of the mortgage.
- The amount is clearly shown on the settlement statement.
Tax Planning Tip #2: Determine that when a property is sold that any unused points get written off. Not doing this is a common mistake.
Property Tax Deduction: Property taxes are deductible as itemized deductions.
The amount of property taxes you can claim beginning in 2018, is limited. All your state and local taxes together are limited to $10,000. The limit is $5,000 if you’re married but file a separate return, and property taxes for personal foreign real property have been eliminated entirely.
Tax Planning Tip #3: If your principal residence’s real estate taxes are being limited or unused, consider a home office or renting out a bedroom to get more of the taxes deducted.