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The Tax Cuts and Jobs Act (TCJA) imposed a lower dollar limit on mortgages qualifying for the home-mortgage-interest deduction. Beginning in 2018 and until this year, taxpayers may only deduct interest of $750,000 of qualified residence loans. This is down from the prior limits of $1 million. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home.
Additionally, the TCJA suspends from 2018 to 2025 the deduction for interest paid on home-equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer's home that secures the loan. The following examples illustrate these points.
Example 1: In January 2025, David took out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2025, the taxpayer took out a $250,000 home-equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed $750,000, all of the interest paid on the loans is deductible. However, if David used the home-equity-loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home-equity loans would not be deductible.
Example 2: In January 2025, Jill took out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2025, she took out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if Jill took out a $250,000 home-equity loan on the main home to purchase the vacation home, then the interest on the home-equity loan would not be deductible.
Example 3: In January 2025, Alex took out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2025, Alex took out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest is deductible.
For more information, see IRS Publication 936, Home Mortgage Interest Deduction.
Barry Lisak is an IRS enrolled agent specializing in personal and small business taxes for 30 years. Any questions can be directed to him at 516-829-7283, or mrbarrytax@aol.com.
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