Background: Prior to the TCA, you could deduct the interest paid on either acquisition debt or home equity debt, or both, within generous limits.
- Acquisition debt: This is defined as a debt where you use the mortgage proceeds to buy, build or substantially improve the home. Typically, acquisition debt represents the main part of a mortgage interest deduction. To qualify for the write-off, the loan must be secured by a qualified residence, such as your principal residence or a second home like a vacation home. The interest is deductible on loans up to a $1 million threshold.
- Home equity debt: When permitted by state law, you previously could deduct the interest on home equity loans secured by a qualified residence, regardless of how the proceeds were used. With a home equity debt, deductions were limited to interest paid on the first $100,000 of debt. Furthermore, the loan amount could not exceed your equity in the home.
Along with other itemized deductions, mortgage interest deductions are claimed on Schedule A of Form 1040. They were subject to the “Pease rule” reducing itemized deductions of high-income taxpayers.
But the TCJA tightened up the rules, beginning in 2018. Notably, it imposed these three changes.
- The threshold for deducting interest paid on acquisition debt is lowered from $1 million to $750,000. This applies to loans originating after December 15, 2017 (or April 1, 2018 if there was a binding contract in place before December