BY WILLIAM PEREZ- the balance

Owning your own home comes with a few nice tax perks. One of them is that the interest you must pay on your mortgage loan is tax deductible.

The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017 and it affects this deduction somewhat, but it’s still available The act does not eliminate it from the tax code entirely, but it sets some new limits and restrictions.

​Claiming Home Mortgage Interest

​You must itemize your deductions on Form 1040, Schedule A to claim mortgage interest. This means foregoing the standard deduction for your filing status—it’s an either/or situation. You can itemize or you can claim the standard deduction, but you can’t do both.

Schedule A also covers many other deductible expenses, however, including real estate property taxesmedical expenses, and charitable contributions. ​Sometimes all these add up to more than the standard deduction for your filing status, making it worth the time and effort to itemize your deductions. Otherwise, you’ll save more tax dollars by skipping the home mortgage interest deduction and claiming the standard deduction instead.

This might be the case in 2018 and going forward through 2025 when the TCJA is set to expire unless Congress renews it. As of 2019, the standard deduction is $6,500 for single taxpayers and married taxpayers who filed separate returns. It is $13,000 for married taxpayers who filed jointly and for qualifying widow(er)s, and $9,550 for those who qualified as head of household.

The TCJA nearly doubles these standard deductions. They’re now $12,000 for single filers and married filers of separate returns, $18,000 for those who qualify as head of household, and $24,000 for married taxpayers filing joint returns and qualifying widow(er)s. As a result, it might become more unlikely that you’ll have enough itemized deductions overall to surpass the standard deduction you’re entitled to. 

It’s usually advisable to complete Schedule A and compare the total of your itemized deductions to your standard deduction to find out which method is most advantageous for you.

Qualifying for the Mortgage Interest Deduction

In 2017, mortgage interest included that which you paid on loans to buy a home, on home equity lines of credit, and on construction loans. But the TCJA eliminates the deduction for home equity debt as of 2018 unless you can prove that the loan was taken out to “substantially improve your residence.” You must indeed use the money for that purpose. In other words, you’re out of luck for the time being if you refinance to pay for your child’s college education.

The deduction is also limited to interest you paid on your main home and/or a second home. Interest paid on third or fourth homes isn’t deductible. That hasn’t changed.

​You must also be legally on the hook for the loan—the debt can’t be in someone else’s name unless it’s your spouse and you’re filing a joint return. It must be a bona fide loan in that you have a contractual obligation to pay it back. Finally, your home must act as security for the loan and your mortgage documents must clearly state this.

​Your home can be a single family dwelling, a condo, a mobile home, a cooperative, or even a boat—pretty much any property that has “sleeping, cooking and toilet facilities,” according to the Internal Revenue Service.

Determining How Much Interest You Paid

You should receive a Form 1098, a Mortgage Interest Statement, from your mortgage lender at the beginning of the new tax year. This form reports the total interest you paid during the previous year. You don’t have to attach the form to your tax return because the financial institution must also send a copy of Form 1098 directly to the IRS.

Make sure the mortgage interest deduction you claim on Schedule A matches the amount reported on Form 1098. The amount you can deduct might be less than the total amount that appears on the form based on certain limitations. Keep Form 1098 ​with a copy of your filed tax return for at least four years.

Dollar Limitations on Home Acquisition Debt

Loans used to buy or build a residence are called “home acquisition debt.” The term refers to any loan you take for the purpose of acquiring, constructing, or substantially improving a qualified home. As of 2017, you could not deduct interest on home acquisition debts of more than $1 million for your main home and/or your secondary residence. The TCJA reduces this to $750,000 as of 2018.

Let’s say you borrowed $800,000 against your primary residence and $400,000 against your secondary residence. Both loans were used solely to acquire or substantially improve the properties. Together, the loans add up to $1.2 million, exceeding the current $750,000 limit for home acquisition debt. You can only claim a mortgage interest deduction for the percentage attributable to the first $750,000 you borrowed.

Joint Mortgages

If you jointly hold the mortgage with someone else who’s not your spouse, you’re entitled to deduct only the interest that you paid personally, regardless of which one of you received Form 1098 from the lender. But there’s a loophole here.

Co-borrowers who make payments specifically to prevent foreclosure can deduct the interest paid even if the interest was supposed to be paid by someone else. The editors of J.K. Lasser’s “Your Income Tax” pass along this tip:

“The Tax Court has allowed a joint obligor to deduct his or her payment of another obligor’s share of the mortgage interest if the payment is made to avoid the loss of property, and the payment is made with his or her separate funds.” (page 382)

Home Construction Loans

You can still deduct interest on mortgages used to pay for construction expenses. The proceeds must be used to acquire the land and for construction of the home. Expenses incurred in the 24 months before construction is completed count toward the $750,000 limit on home acquisition debt.

But there’s a catch here, too. If you deduct interest on a construction loan for two years and you then decide to sell the property rather than move in and use it as your residence, you might have to restate your tax returns for the years you deducted the interest to characterize it as investment interest instead. This can limit its deductibility.

In other words, the IRS might want some money back.

Points Paid

Points paid on acquisition debt for primary and secondary homes are fully deductible in the year they’re paid. Points aren’t always reported on Form 1098, but you might be able to find them on your settlement statement.

When to Seek the Help of a Tax Professional

Figuring out the home mortgage interest deduction is straightforward for some taxpayers, but not so much for others.

Add up the interest reported on your Forms 1098 and enter the total on Schedule A. You can use the worksheet in Publication 936 to calculate your allowable deduction.

You might want to check with a tax professional, however, if you bought or sold property during the tax year, or if your home acquisition debt exceeds the new $750,000 limit. In fact, it would make sense to seek the advice of a tax pro even before you buy or sell real estate if only to get a handle on the tax consequences of your decision.