Mortgage Interest Deductibility

March 23, 2019

Robert Katz, CFP®Michael Syer, CFP®

KnowledgeSHARE

Declining Mortgage Rates

As investors targeted lower risk assets at the end of March, the 30-year fixed mortgage rate hit a 14-month low with rates seeing their biggest weekly decline since June 2009.  Given the recent pattern of declining mortgage interest rates, it may be a favorable time to consider a rate modification, refinance, or cash-out refinance. But before you act, you must consider the recent tax changes regarding the deductibility of mortgage interest.

The 2017 Tax Cuts and Jobs ACT (TCJA)

The recent tax legislation brought sweeping changes to the tax landscape which saw significant modifications to the available tax deductions.  One of these changes impacted the deductibility of mortgage interest for taxpayers who itemized their deductions.  Under prior tax law, the mortgage deduction was limited to the interest on loans up to $1M.  Under the TCJA of 2017, the debt limit has now been reduced to $750K for loans obtained after 12/15/2017.

Acquisition Indebtedness

Another important detail that can affect the deductibility of mortgage interest is how the debt or loan proceeds are used.  For the mortgage interest to be tax deductible, it must be considered “acquisition indebtedness” which means it must actually be used to “acquire, build, or substantially improve the residence.” The loan must also be secured by that residence alone and cannot be secured by any other property. If the loan proceeds were used for any other purpose (such as an investment, paying off debt, or purchasing another home) the interest paid on that portion is not tax deductible.

Example

John and Mary live in a home which was originally purchased for $800K with a 30-year fixed mortgage of $600K. After living in the home for 20 years, the outstanding mortgage balance is now $300K.  They decide to refinance their mortgage back to the original loan amount of $600K.  They use the $300K cash-out refinance to purchase a vacation home.  As the proceeds of the loan were secured by their original home and used for another purpose, the mortgage interest on $300K of the loan is not tax deductible.

Example – modified

Instead of refinancing their mortgage to purchase a vacation home, John and Mary decide to use the $300k cash-out refinance to build an addition to their home.  As the mortgage was secured by the property and the loan proceeds were used to substantially improve their residence, all of the mortgage interest is fully deductible.

Bottom Line

Whether you are looking to refinance to save interest or tap into your home’s equity for a renovation or purchase of a vacation home, it is important to assess and consider the tax benefits and deductibility.  Given the interest rate environment and new tax landscape, looking at all the relevant factors is central to making an informed decision and reaching your financial goals.

Want to Learn More?

Feel free to contact our Wealth Strategies group if you have questions on this estate planning topics or would like help connecting to an estate attorney.

Robert Katz, CFP® – Partner, Director of Wealth Strategies – 617.986.5145 

Michael Syer, CFP® Wealth Strategies Advisor – 617.986.5157

Nicole DellaPasqua – Client Associate – 617.986.5159

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