5 Tax Areas of Concern for Deducting Mortgage Interest In 2019

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If you are going to buy a home in 2019, you will need to do more than simply get approved for your loan, find a home and a good agent. It also is important to understand how buying a home will affect your taxes. It is very important that you make good financial decisions to maximize your tax deductions on your mortgage in 2019.

mortgage interest deduction

Are you benefiting from all possible mortgage interest tax-write-offs?

Because of tax reforms that were put in place at the end of 2017, buying and maintaining a home is quite different from a tax perspective than it was before.

In 2018, many homeowners mistakenly missed tax deductions on mortgage interest because they overlooked new tax laws.

It’s no secret that Congress passed tax reform bills in the eleventh hour and the impact for tax filings was significant.

Here are the key areas of concern regarding taxes, home loans and mortgage interest in 2019 and beyond.

Mortgage Interest Deduction May Not Be Worth It

One of the long-time benefits of owning a home was to deduct mortgage interest from taxable income. Mortgage interest can only be deducted if you are in the 30% of taxpayers who itemize their taxes. Of all the people who itemize, three out of four claimed a deduction for mortgage interest on their home, according to 2016 data.

Approximately 21% of all tax filers have claimed this important tax deduction before. This deduction saved them $77 billion in 2016. The typical benefit to a taxpayer using the deduction was estimated at almost $2000 in 2016. But homeowners with a higher income got more of a benefit.

But in 2019, the standard deduction is almost doubled. This reduces the incentive of many homeowners to itemize and to write off mortgage interest. It is estimated that the number of tax filers that will claim this deduction will go from 21% to about 4%. This is all due to the doubling of the standard deduction. So, many fewer homeowners will get a break on their taxes from the federal government because of their mortgage.

Can’t Write Off All Interest on Expensive Home

It used to be that wealthy homeowners with big home loans would get the best tax breaks from using the home mortgage deduction. But things are changing in 2019. The mortgage interest deduction has been limited to $750,000 for any new mortgages. Before, homeowners could write off mortgage interest up to $1 million.

This change in the tax laws will likely make it harder to sell pricier homes. This could reduce their value. It will certainly make it more expensive to buy high end homes. Home-buyers in expensive areas, such as Washington DC and San Francisco, are likely to see the biggest effects in 2019. Just in California, there are seven counties where homes cost $750,000 on average.

Because homeowners usually make a down payment, people with homes that are valued up to $940,000 who put down at least 20% will still be able to write off the total interest on their home loans. Still, many owners who are in areas with higher housing costs will probably have at least some interest on their home loans that they cannot deduct in 2019.

You Cannot Deduct Home Equity Loan Interest

Home equity loans and home equity lines of credit allow homeowners to pull equity from their property and use it for what they like. Typical uses include home renovation, business start up and expansion, and paying for college tuition. You can still get a home equity loan in 2019, but you cannot deduct the interest on these second mortgages. Before, homeowners could deduct up to $100,000 of mortgage loan interest.

You Cannot Deduct Mortgage Interest on Second Home

Do you have a vacation home? That’s great for you, but tax reform in 2019 means that you will have to pay more for it. You cannot write off mortgage interest on your second home anymore. Before, you could write off mortgage interest on a second home and your first home as long as the mortgages were not more than $1 million together.

If you have a vacation home that you bought before 2018, though, you still can write off mortgage interest on it. The new tax law only applies to new purchases.

State and Local Taxes Might Not Be Deductible

If you buy a home, one of the costs to consider is your property taxes. Real estate taxes can be high, but homeowners under the old rules could deduct the full value of property taxes paid to the local government. This is not true anymore.

Tax reform passed for 2018 and beyond capped the total state and local tax deduction at $10,000. If your home’s property taxes combined with your other local taxes are more than $10,000, you will not be able to write it off. This change is hitting wealthier homeowners in the wallet in higher tax states such as New York and Connecticut. Just in Westchester County in New York, 75% of homeowners pay above 10k per year in property taxes.

The bottom line is that the tax law changes for 2018, 2019 and beyond will affect how much you can write off on your taxes related to owning your home and having a mortgage. The reality is that mortgage interest deduction opportunities may be more complex than in previous years, so discussing your situation with an experienced tax adviser is strongly recommended.




About Bryan Dornan

Bryan Dornan is Chief Editor of RefiGuide.org. Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. Should you have any questions about articles like this, let him know.