The interest paid deduction was the second largest itemized deduction, accounting for 23.3% of all itemized deductions. Interest paid includes both investment interest (after applicable limitations) and mortgage interest. While no changes were made to the deductibility of investment interest, significant changes were made to that of mortgage interest.
Under the Act, interest deductions are allowed on acquisition debt (debt incurred during the construction, improvement, or purchase of a primary or secondary residence) up to $750,000 for married filing joint (MFJ) taxpayers, as opposed to the $1M before the law change. Grandfathering rules allow the old $1M threshold to apply to debt related to the following scenarios:
- a written contract in place by Dec. 15, 2017, where the purchase was finalized by April 1, 2018, or
- home acquisition debt taken out before Dec. 16, 2017, and then refinanced later (as long as the new loan does not exceed the principal balance on the old loan at the time of refinancing).
Interest on secondary homes may also still be deductible. Taxpayers are able to deduct acquisition debt interest on a secondary residence, up to the applicable threshold amount, if their primary residence debt has not yet reached that limit.
Mortgage interest on home equity debt often referred to as HELOC interest, is now only deductible if the home equity debt was used to buy, build, or substantially improve the taxpayer’s home that secures the loan. Interest on loans used for any other purpose, such as to pay off personal debt, is no longer deductible. Interest on home equity debt that was taken out prior to Dec. 16, 2017, and used for disallowed purposes is not grandfathered and therefore not deductible. However, existing HELOC loans used for qualified expenditures prior to that date can still be considered additional home acquisition debt up to the old $1M threshold.