Tax Breaks for Homeowners: What's Still Deductible, and What's Not

One of the most highly touted benefits of homeownership has traditionally been the write-offs homeowners can claim to reduce their federal income tax bills. However, the Tax Cuts and Jobs Act (TCJA) of 2017 cuts back on deductions for many homeowners – and some homeowners may no longer get any bang for the buck when it comes to the cost of homeownership. Here’s a rundown of what’s still deductible — and what’s not — under the new tax law.

Home Mortgage Interest 

Homeowners can claim an itemized deduction for “qualified residence interest” paid on debt secured by a primary residence and one other residence.

In the case of “acquisition indebtedness” incurred to buy, build or substantially improve a home, prior law limited the deduction to the interest on $1 million of debt ($500,000 for married individuals filing separately). Effective for tax years beginning after 2017 and before 2026, the new law cuts the deduction back to the interest on $750,000 of acquisition debt ($375,000 for married individuals filing separately).

KEY POINT: The $750,000 debt limit generally applies only to new homeowners. The $1 million acquisition debt limit continues to apply to acquisition debt incurred before Dec. 15, 2017. Moreover, the $1 million dollar limit will apply to homeowners who entered into a written binding contract before Dec. 15, 2017, to close on a principal residence before Jan. 1, 2018, and who actually purchased the residence before April 1, 2018. A refinancing of acquisition debt incurred before Dec. 15, 2017, will continue to be subject to the $1 million limit, provided the refinancing doesn’t exceed the amount of the original debt.

Home equity debt is a different story. Under prior law, taxpayers could deduct the interest on up to $100,000 of home equity indebtedness ($50,000 for married individuals filing separately). For 2018 through 2025, the new law eliminates all deductions for interest on home equity debt, regardless of when the debt was incurred.

KEY POINT: The fact that a debt is called a home equity loan or home equity line of credit does not automatically mean the interest is nondeductible. It’s the