The Tax Cuts & Jobs Act (TCJA) altered the tax code to a degree not seen before in decades. The TCJA eliminated 1031 exchanges of personal property, for instance.
Prior to the TCJA, personal property 1031 exchanges were performed very frequently; it was common for car rental companies, as an example, to regularly exchange their old rental vehicles for new ones.
The TCJA also made a major change to the deductibility of mortgage debt interest and home equity debt interest.
The deduction for mortgage interest and home equity debt interest has been a very significant tax break for homeowners. Prior to the TCJA, this break had been untouched since the 1980s.
Given the emphasis our society places on homeownership, you’ll likely encounter many clients who want to understand how the updated version of this deduction works.
Explaining the changes made in the TCJA to laypeople won’t be easy, but with a bit of work you should be able to give your clients a basic understanding of the mortgage interest deduction.
Deductibility of Mortgage Interest Prior to TCJA
Under the old rules prior to the TCJA, itemizers could deduct the interest on the first $1 million ($500,000 for married person filing separately) of their home mortgage debt.
In addition, they could deduct the interest on the first $100,000 of their home equity debt (i.e. HELOC); this was true regardless of whether the home equity loan proceeds were used for home building purposes.
So, if a person acquired a mortgage loan of $900,000 to purchase a new primary residence, that person would be able to deduct the entire amount of interest paid on this principal.
If the mortgage loan were $1.2 million, only the amount of interest paid on the initial $1 million of this mortgage loan would be deductible.
Deductibility of Mortgage Interest After the TCJA
The TCJA altered the principal amount on which mortgage interest may be deducted. Now, instead of $1 million, the limit is the first $750,000 of mortgage principal ($375,000 for married filing separately).
The mortgage loan proceeds must be used for the acquisition or improvement of a personal residence, and the loan must be secured by…
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