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Money April 2018

Dollar Sense

With the New Tax Cut Rules, Can You Still Deduct Home Mortgage Interest?

By Teresa Ambord

In addition to the interest being tax deductible (if you qualify), certain improvements that you make to your home to accommodate your disabled condition, or that of your spouse or dependent who lives with you, may bring a tax break.

What about the cost to modify your home for disabilities?

If you’re worried that the new tax law will leave you unable to deduct your home mortgage interest, you may be worrying too soon, that is, unless you have an enormous mortgage. The rules have changed, but they’re still generous. Under the Tax Cuts and Jobs Act (TCJA), you can deduct interest on up to $750,000 worth of mortgage debt that you incurred to buy or improve a first or second home, for 2018 through 2025. 

Suppose you are married but file separate tax returns? You are each entitled to claim 50% of the interest incurred on up to $375,000 of home purchase debt. (You can generally apply the 50% rule to other amounts listed if you are filing married but separate returns.)

 

How did the TCJA change the deductibility of interest on existing mortgages? Are they grandfathered in?

Previously you could deduct interest on up to $1 million of home purchase debt. If your mortgage was taken out before December 16, 2017, the TCJA does not affect the deductibility of interest on home purchase debt of up to $1 million. The same is true if you had a binding contract in effect before December 16, 2017 as long as the home purchase closes by April 1, 2018.

Also grandfathered in: If you took out a home mortgage prior to December 16, 2017, and then refinanced that loan in the period from December 16, 2017, and extending through 2025, the $1 million limit still applies (to the extent the initial balance of the new loan doesn’t exceed the principal balance of the old loan at the time of refinancing).

 

What about interest on a home equity loan?

The TCJA generally eliminates this deduction. Under prior law, individuals could deduct interest on up to $100,000 of home equity debt. While interest on new home equity loans are not universally deductible, there is an exception. If you take out up to $100,000 in home equity debt for the purpose of buying or improving a first or second home, that debt can be treated as additional home purchase debt, provided the total home purchase debt does not exceed the limit that applies ($750,000 on new loans, and $1 million on grandfathered loans) and the proceeds of the new loan are used only to substantially improve the home.

Here’s an example:

An unmarried taxpayer takes out an $800,000 first mortgage to buy a home on December 1, 2017, which means his loan is grandfathered in, and the mortgage interest is deductible. In 2018 he takes out a home equity loan of $75,000 to improve his home. The total of both loans equals $875,000 which is well below the grandfathered limit of $1 million. That means the combined loans are treated as home purchase debt, and the interest is deductible, assuming the proceeds of the home equity loan are used to substantially improve the home. On the other hand, if the same taxpayer uses the home equity loan proceeds for other purposes, such as to pay off credit card debt or to buy a car, it does not qualify as home purchase debt, and is not deductible.

 

SIDEBAR: What is a Substantial Home Improvement?

A substantial home improvement adds to the value of your home, prolongs the home’s useful life, or adapts the home to new uses. Repairs are generally not considered substantial improvement, though there are exceptions, for example, painting a room falls under the heading of a repair, but as part of a remodel, it will likely be treated as a deductible improvement.

In addition to the interest being tax deductible (if you qualify), certain improvements that you make to your home to accommodate your disabled condition, or that of your spouse or dependent who lives with you, may bring a tax break. The cost of those improvements can be added to your medical expenses and possibly deducted on your taxes, to the extent the total exceeds 7.5% of your adjusted gross income. Examples include the cost to widen doorways to entrances and exits, or to construct ramps at entrances and exits, modify stairways, install handrails or grab bars, lower or modify cabinets and equipment. Visit this IRS site to read more about what is deductible: https://www.irs.gov/publications/p502#en_US_2017_publink1000178902

Some U.S. counties have or are seeking to offer tax credits for seniors who need to modify their homes so that they can remain living there (as opposed to moving to a long-term care facility). There’s also a national debate (off and on) about federal tax credits for such modifications. If you’re a candidate for home modification, check with your local senior advocate to see if there is help available. And it doesn’t hurt to let your senators and representatives in Congress know that you support federal tax credits for home modification related to disabilities.

 

[This article is based on information from a Checkpoint Marketing article written by tax columnist, Bill Bischoff.]

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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