If you own a home, you probably want to take advantage of the many deductions you are eligible to receive at tax time. Even though the tax guidelines changed for 2018, you may still be able to deduct not only the interest on your first mortgage, but the interest on your second mortgage as well.
First, let’s look at the rules.
Any interest that you deduct must be for loans that you used to buy, build, or improve your home. Pay close attention to those rules as they pertain to your home equity loan or home equity line of credit. Did you take out the second mortgage to help you have money to buy the home or even build it? Did you tap into your home’s equity in order to make home improvements?
If you answered ‘yes’ to any of those questions, you may be eligible to deduct the interest from your second mortgage, whether a home equity loan or line of credit. If you answered ‘no’ to those questions, you may be ineligible to deduct the interest. For example, if you tapped into your home equity to pay for your child’s college education or you consolidated your personal debt, you will be unable to deduct the interest paid.
Other miscellaneous rules include:
- You must be the primary owner
- You must live in the property
- You must make your payments on time
The Limits of What You Can Deduct
Now let’s look at the unpleasant part of the deduction. How much can you deduct?
First, your mortgages cannot total more than $1 million if you are single or married filing joint. If you are married filing separately, the maximum is $500,000. This applies to tax years up to 2018. As of 2017, the new maximum is $750,000, but any mortgages in existence prior to December 14, 2017 get to keep the $1,000,000 maximum.
Where you may run into trouble, though, is whether or not you can itemize your deductions. For tax year 2018, the IRS has raised the standard deduction. This means that it may not make sense for you to itemize your deductions anymore. If you fall into that category, then you’ll just take the standard deduction, which means you won’t deduct the interest paid on your mortgage. While it sounds unsettling, you may come out with more money in your pocket with the higher standard deduction and potentially lower tax rates that the tax reform was supposed to provide.