The tax deduction for mortgage interest has long been a favorite of American taxpayers. After all, home and property ownership are linchpins of the American Dream. The new tax reform law, however, contains provisions regarding the mortgage interest deduction that may affect Americans who own, or hope to own, a vacation home.
Before the 2017 tax reform law, homeowners were permitted to deduct interest for “qualified residence interest.” In other words, interest paid for mortgages on qualified residences or for home equity loans was deductible.
With the new tax law, the deduction for mortgage interest decreased from $1 million to $750,000 for homes purchased before December 15, 2017. This means you can only deduct the interest paid on mortgages totaling $750,000 or less. (The deduction for taxpayers who are married, but filing separately, is $350,000.)
In addition, interest paid on home equity loans is deductible only in limited circumstances.
Not necessarily. Having multiple mortgages that total $750,000 or less means you can still take the deduction.
Say you currently hold a $600,000 mortgage on your home. You have your eye on a sweet beach house that requires an additional $250,000 mortgage. You will be able to deduct the mortgage interest for the $600,000 mortgage and $150,000 of the second mortgage.
However, if your current mortgage is $1 million, buying a second home will not offer any tax breaks for mortgage interest.
As with any new law, we need to watch for unforeseen consequences and revisions in the coming years.
The lasting effects of tax reform may not be felt for some time. It’s safe to say, though, that any changes to tax law may affect any tax strategies you’re using in your estate plan.
John Mangan is an experienced Florida estate planning attorney who has been board certified in Wills, Trusts & Estates by the Florida Bar. At Law Offices of John Mangan, P.A., we help clients develop an estate plan that’s appropriate for their circumstances. Call us at 772-324-9050 to set up an appointment or use our Contact Form.