Tax Reform Creates Confusion Around the Home Mortgage Interest Deduction

Over the last several weeks, the CLA Financial Institution team has received numerous questions about how the new tax law signed by the President in December impacts the home mortgage interest deduction for customers.

Starting in 2018, the dollar amount of loans eligible for the deduction for home mortgage interest on acquisition indebtedness is reduced from $1 million to $750,000. The deduction for interest on home equity indebtedness, which was previously allowed on up to $100,000 of debt is suspended entirely.  The new $750,000 limit does not apply to acquisition indebtedness incurred before December 15, 2017 so existing mortgages have been grandfathered.

But this change is more complicated than it first appears because most financial institutions and their customers have not had to consider the underlying tax rules governing these deductions. There are several requirements in place that could further limit a customer’s ability to take the deduction.

  1. The customer must itemize their deductions. And with the new higher standard deduction, up to $24,000 for married couples filing jointly, many fewer individuals will be itemizing under the new tax law.
  2. To be deductible, the loan must be on a qualified residence. This can be the taxpayer’s principal residence or one other residence selected by the taxpayer.
  3. To be deductible, the loan must be “acquisition indebtedness”. This means that the proceeds of the loan must be traceable to expenditures to acquire, construct, or substantially improve a qualified residence.

So just because a loan is a first mortgage on a personal residence doesn’t mean that the customer will automatically get a tax deduction. If they took out the mortgage against their existing home to buy a boat or play the stock market, the loan would not meet be considered acquisition indebtedness and therefore not be tax deductible.  (Though the interest would still need to be reported on a Form 1098 since the loan is secured by real estate.)

Under the old laws, the home equity interest deduction would have made at least some of this interest deductible depending on the size of the loan, because the purpose of the loan under that deduction was not restricted.

At the end of the year, it is up to the customer and their tax preparer to determine if the loan interest will be deductible, but it is important that financial institutions understand the basic rules so that they can properly advise their customers.

The CLA Financial Institution team is here to help you work through the nuances of the new tax reform law. Please contact a member of our team to discuss these matters further.

  • Financial Institutions Principal
  • CliftonLarsonAllen
  • Peoria, IL
  • 309-495-8842

Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.

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