Understanding Mortgage Interest Deduction and How Recent Changes May Affect Your Deduction
Are you one of the many homeowners who refinanced your mortgage during the previous year? Perhaps you did a cash-out mortgage to improve your property or to consolidate debt. The ability to deduct your mortgage interest deduction may have been affected and you may want to consult with your tax accountant before filing your 2021 taxes.
As a result of the passage of the Tax Cuts and Jobs Act of 2017, the ability of a taxpayer to claim itemized household deductions has been changed. For example, the ability to deduct mortgage interest on all newly contracted home mortgage loans (acquisition indebtedness) has a loan limit of $750,000 for a jointly filed return and $375,000 for a separately filed return. The former limit was $1,000,000 ($500,000 for couples filing separately). Also, interest paid on all home equity loans (home equity indebtedness) which are taken where the proceeds are otherwise not used to improve a first or second residence is no longer deductible until the tax year 2026. Home Equity Indebtedness carries a loan limit of $100,000.
Home Acquisition Debt
Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It also must be secured by that home. If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. The additional debt may qualify as home equity debt.
Acquiring an interest in a home because of a divorce. If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt.
Home Equity Debt
If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt.
Buying A New Home With Cash
Also, an important point to know is that when a buyer purchases a new home with cash, the Internal Revenue Service provides a 90-Day window after the purchase to take out a mortgage in order for the new mortgage to be considered acquisition indebtedness. Mortgage applied for after the 90-day window will be considered home equity indebtedness and have a stricter limit on the deductibility.
For example: After the divorce was final, David purchased a new home with $500,000 cash. David’s intent was to replenish his cash reserves in the near future by taking out a loan on the property. 4 months after the purchase, David applied for and closed a new mortgage loan in the amount of $300,000.
Because David did not apply for the new mortgage loan within the IRS 90-Day window, the new mortgage is no longer considered Acquisition Indebtedness and the new mortgage falls into the Home Equity category with a limit of $100,000. David loses the mortgage interest deduction of $200,000 because it is over the limit of the Home Equity category. Additionally, the Home Equity mortgage interest deduction is suspended until the end of the tax year 2025.
Certified Divorce Lending Professionals are trained to work as financial neutrals in a divorce situation. Their goal is to look at all options and remove as many hurdles as possible for both spouses who wish to obtain mortgage financing. The verbiage, or lack thereof, contained in the divorce settlement agreement can be an obstacle for either party going forward once the divorce is final. A CDLP’s goal is to help recognize these obstacles and set each party up for success.
Divorce Mortgage Planning is a holistic approach to evaluating mortgage options in the context of the overall financial objectives as they relate to divorcing situations. Working directly with the divorce team, a CDLP™ understands the intersection of divorce, tax, real estate, and mortgage financing. The role of the CDLP™ is to help integrate the mortgage selected into the overall long and shortterm financial and investment goals to help minimize taxes, minimize interest expense, and maximize cash flow.
Involving a Certified Divorce Lending Professional (CDLP™) early in the divorce settlement process can help the divorcing homeowners set the stage for successful mortgage financing in the future.
If you’d like to start the process of getting a home, come see us at the Tammi Lindley Team. We are Portland’s premier mortgage lenders, offering hundreds of mortgage products so you can pick the mortgage that matches your needs. Contact us today and start the process of owning your dream home.