Mortgage Interest Deduction Loophole

For tax years starting after December 31, 2017 and before January 1, 2026, the new tax laws have reduced the amount of mortgage interest a taxpayer can deduct – mortgage interest on an “acquisition loan” is tax deductible only on the principal loan amount up to $750,000 and interest on home equity loans is no longer deductible. However, there are a few exceptions to this rule that might will help you thinkSMART, Save Money And Reduce Taxes.
Under the NEW TAX LAW, you can generally deduct mortgage interest on a home acquisition loan up to $1 million if:
  • you had an original loan on or before December 15, 2017
  • you refinance a loan that existed prior to December 15, 2017 and the refinanced amount is not more than the amount of the original loan amount. Note the refinanced loan must generally be made within the terms of the original loan or within the term of the 1st refinancing
  • you entered into a binding contract before December 15, 2017 to close on the purchase of principal residence and purchased the residence before April 1, 2018

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Definitions & Terms

Per Internal Revenue Code 163(B)

In general The term “acquisition indebtedness” means any indebtedness which—

(I)is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
(II) is secured by such residence.
Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

Per Internal Revenue Code 163(C)

(i)In general The term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed—

(I) the fair market value of such qualified residence, reduced by
(II)the amount of acquisition indebtedness with respect to such residence.