2019 Tax Filing Season (2018 Tax Year): Examples of Deducting Interest on Mortgage Debt and Home Equity Loans

2019 Tax Filing Season (2018 Tax Year): Examples of Deducting Interest on Mortgage Debt and Home Equity Loans

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Updated February 21, 2019
2019 Tax Filing Season (2018 Tax Year): Examples of Deducting
Interest on Mortgage Debt and Home Equity Loans
Recent changes to the mortgage interest deduction have
separate and additional limit of $100,000 applied to home
created some confusion among homeowners, particularly
equity loans that were used to finance costs unassociated
regarding the treatment of home equity loans. This In Focus
with the home, such as paying for a child’s college
explains the current tax treatment of mortgage interest and
education. Thus, a homeowner’s combined mortgage and
home equity loans resulting from the enactment of P.L.
home equity debt was capped at $1.1 million.
115-97, often referred to as “The Tax Cuts and Jobs Act.”
For more information on the recent changes, see CRS In
Generalized examples are provided to illustrate how certain
Focus IF11063, 2019 Tax Filing Season (2018 Tax Year):
homeowners may be impacted by these recent changes.
The Mortgage Interest Deduction, by Mark P. Keightley.
Current Law (2018-2025)
Examples
A taxpayer may claim an itemized deduction for the interest
The interaction between the applicable mortgage limit and
paid on mortgage debt secured by a principal residence or a
the use of proceeds from a home equity loan has been a
second home, subject to one of two limits on the amount of
source of confusion. The following examples illustrate how
mortgage debt that qualifies for the deduction. Which limit
the current rules for deducting interest on mortgages and
is applicable depends on when the debt was incurred. A
home equity loans apply.
taxpayer may also deduct the interest on a home equity loan
under certain circumstances.
In the examples presented below, it is assumed that the tax
filers are a married couple filing jointly, have one home,
For mortgage debt incurred before December 16, 2017, the
and that their mortgage is secured by the underlying
deduction is limited to the interest on the first $1 million
property. It is also assumed they are filing their 2018 tax
($500,000 for married filing separately) of combined
return. To keep the examples tractable, only the information
mortgage debt. For mortgage debt incurred on or after
necessary to highlight the general tax treatment that applies
December 16, 2017, the deduction is limited to the interest
is presented. Whether the scenarios presented below will
incurred on the first $750,000 ($375,000 for married filing
apply to a particular taxpayer will depend on all the facts
separately) of combined mortgage debt. Mortgage debt
and circumstances of their case.
resulting from a refinance is treated as having been incurred
on the origination date of the original mortgage for
Example 1
purposes of determining which mortgage limit applies.
Mortgage:
The interest on home equity loans is deductible under two
 Origination date: January 1989.
circumstances. First, the loan must be used to finance
 Current mortgage balance: $0.
expenditures related to the home—for example, to remodel
a kitchen. This restriction applies regardless of when the
Home equity loan:
original mortgage or home equity loan home was
originated. Second, the homeowner’s combined mortgage
 Origination date: July 2018.

debt on their primary and secondary residences, plus the
Home equity loan balance: $50,000.

balance on their home equity loan, cannot exceed the
Used for: Payoff student loans.
applicable loan limit ($1 million or $750,000).
The couple has no mortgage interest to deduct and would
Determining the applicable loan limit is slightly more
not be allowed to deduct the interest associated with home
complicated when a homeowner has mortgage and home
equity loan because the proceeds were not used to improve
equity debt that is subject to the $1 million limit (i.e., was
their home.
incurred before December 16, 2017), and then later incurs
Example 2
debt that is subject to the $750,000 limit (i.e., was incurred
on or after December 16, 2017). In this case, the older debt
Mortgage:
that is subject to the $1 million limit counts toward the
 Origination date: January 1989.
$750,000 limit for any newer debt. This scenario is
 Current mortgage balance: $0.
illustrated in Example 8 and Example 9 presented later.
Prior Law (2017)
Home equity loan:

Under prior law, a homeowner was allowed an itemized
Origination date: July 2016.

deduction for the interest paid on the first $1 million of
Home equity loan balance: $50,000.

combined mortgage. Homeowners were also allowed to
Used for: Payoff student loans.
deduct the interest paid on a home equity loan. However, a
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2019 Tax Filing Season (2018 Tax Year): Examples of Deducting Interest on Mortgage Debt and Home Equity Loans
The couple has no mortgage interest to deduct and would
limit ($1 million) for mortgages originated before
not be allowed to deduct the interest associated with home
December 16, 2017.
equity loan. Even though the home equity loan was
originated before December 16, 2017, the proceeds were
Example 7
not used to improve their home.
Mortgage:

Example 3
Origination date: February 2015.
 Current mortgage balance: $800,000.
Mortgage:

Home equity loan:
Origination date: February 2018.
 Current mortgage balance: $600,000.
 Origination date: November 2016.
 Home equity loan balance: $90,000.
Home equity loan: None
 Used for: Home remodel.
The couple would be allowed to deduct all mortgage
The couple would be allowed to deduct all mortgage
interest paid because they are below the applicable loan
interest paid because they are below the applicable loan
limit ($750,000) for mortgages originated on or after
limit ($1 million) for mortgages originated before
December 16, 2017.
December 16, 2017. They would also be allowed to deduct
Example 4
the interest paid on the home equity loan because it was
originated before December 16, 2017, the proceeds were
Mortgage:
used to improve their home, and their total combined debt
 Origination date: February 2018.
(mortgage plus home equity loan) is less than $1 million.
 Current mortgage balance: $600,000.
Example 8
Home equity loan:
Mortgage:
 Origination date: November 2018.


Origination date: February 2015.
Home equity loan balance: $100,000.


Current mortgage balance: $800,000.
Used for: Home remodel.
Home equity loan:
The couple would be allowed to deduct all mortgage
interest paid because they are below the applicable loan
 Origination date: November 2018.
limit ($750,000) for mortgages originated on or after
 Home equity loan balance: $90,000.
December 16, 2017. They would also be allowed to deduct
 Used for: Home remodel.
the interest paid on the home equity loan because the
The couple would be allowed to deduct all mortgage
proceeds were used to improve their home and their total
interest paid because they are below the applicable loan
combined debt (mortgage plus home equity loan) is less
limit ($1 million) for mortgages originated before
than $750,000.
December 16, 2017. They would not be allowed to deduct
Example 5
the interest paid on the home equity loan because debt
Mortgage:
incurred before December 16, 2017, counts toward the

$750,000 limit for debt incurred on or after December 16,
Origination date: February 2018.

2017.
Current mortgage balance: $600,000.
Home equity loan:
Example 9
Mortgage:
 Origination date: November 2018.


Home equity loan balance: $100,000.
Origination date: February 2015.
 Used for: Children’s college education.


Current mortgage balance: $700,000.
The couple would be allowed to deduct all mortgage
Home equity loan:
interest paid because they are below the applicable loan
 Origination date: November 2018.
limit ($750,000) for mortgages originated on or after
 Home equity loan balance: $90,000.
December 16, 2017. They would not be allowed to deduct
 Used for: Home remodel.
the interest paid on the home equity loan because the
proceeds were not used to improve their home.
The couple would be allowed to deduct all mortgage
interest paid because they are below the applicable loan
Example 6
limit ($1 million) for mortgages originated before
Mortgage:
December 16, 2017. They would be allowed to deduct the
 Origination date: February 2015.
interest paid on the first $50,000 of their home equity loan
 Current mortgage balance: $800,000.
because the $750,000 limit for debt incurred on or after
December 16, 2017, is reduced by the amount of debt
Home equity loan: None
incurred before December 16, 2017. Thus, they have
$750,000 - $700,000 = $50,000 left under the limit that
The couple would be allowed to deduct all mortgage
applies to new debt.
interest paid because they are below the applicable loan
Mark P. Keightley, Specialist in Economics
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2019 Tax Filing Season (2018 Tax Year): Examples of Deducting Interest on Mortgage Debt and Home Equity Loans
IF11111

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