New Tax Law Caps Limit on Home Mortgage Debt Deduction at $750,000

Congress significantly reduces benefit of home mortgage interest deduction.


Several provisions within the Tax Cuts and Jobs Act of 2017 will affect people who own homes or property. Among these is a new cap on the amount of mortgage debt one can deduct interest on, as well as an end to deductibility for most home equity loans.

In past years, owners of a principal or second home could take an itemized deduction for their interest on mortgage debt of up to $1 million ($500,000 for married persons filing separate returns), plus home equity debt of up to $100,000. For tax years 2018 and onward through the year 2025, however, the limit on mortgage loans whose interest can be deducted is $750,000 ($375,000 for married taxpayers who file separately). This includes mortgage interest on both first and second homes.

And, the interest on a home-equity loan will be deductible only in situations where you use the proceeds to substantially improve the home itself. (Not when you're using your home as collateral for money to be used for some other purpose.)

This new limit actually applies to loans taken out after December 14. So if you took out a mortgage loan on or after December 15 of 2017, the new limits will apply to you unless you fall into the following exception: "the case of a taxpayer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018. . . ."

If you're unsure of exactly what that means, or when exactly you need to close on the purchase, you're not alone. Hopefully answers will be forthcoming from the IRS soon.

What about interest on mortgage refinancing? You can continue to deduct this if your mortgage existed before December 14 with the old limit of up to $1 million in debt, so long as the amount of your new loan does not exceed the amount you refinanced.

In 2025 (which seems like forever away now), the picture will change again. The prior $1 million limitation will be restored, and you will be able to take deductions for interest regardless of when the you took out the loan. The suspension for home equity indebtedness will also end then.

Effective Date: January 1, 2018