Have you refinanced your mortgage recently, perhaps opting for a cash-out mortgage to improve your property or consolidate debt? Changes to your mortgage interest deduction may affect you, so consulting with your tax accountant before filing your taxes is essential.
Impact of the Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act of 2017 brought significant changes to the ability of taxpayers to claim itemized deductions, including mortgage interest. Key changes include:
- Loan Limits: The mortgage interest deduction on new home mortgage loans (acquisition indebtedness) is now limited to $750,000 for joint filers and $375,000 for separate filers, down from $1,000,000 ($500,000 for separate filers).
- Home Equity Loans: Interest paid on home equity loans not used to improve a first or second residence is no longer deductible until the 2026 tax year. Home equity indebtedness has a loan limit of $100,000.
Home Acquisition Debt
Definition: Home acquisition debt is a mortgage taken out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home) and must be secured by that home. Only the debt up to the cost of the home plus improvements qualifies as home acquisition debt.
Divorce Considerations: If you incur debt to acquire the interest of a spouse or former spouse in a home due to divorce or legal separation, you can treat that debt as home acquisition debt.
Home Equity Debt
Definition: Home equity debt is a loan taken for reasons other than buying, building, or substantially improving your home. Additionally, debt incurred to buy, build, or improve your home that exceeds the home acquisition debt limit may qualify as home equity debt.
Buying a New Home with Cash
IRS Rule: When a buyer purchases a new home with cash, the IRS provides a 90-day window after the purchase to take out a mortgage for it to be considered acquisition indebtedness. Mortgages applied for after this period are considered home equity indebtedness with stricter deductibility limits.
Example: After his divorce, David bought a new home with $500,000 cash, planning to replenish his cash reserves by taking out a loan on the property. Four months later, he closed a $300,000 mortgage loan. Since David did not apply for the mortgage within the 90-day window, it is considered home equity indebtedness, with a deductible limit of $100,000. Consequently, David loses the mortgage interest deduction on $200,000 of the loan because it exceeds the home equity limit, and the deduction is suspended until the end of the 2025 tax year.
Role of Certified Divorce Lending Professionals (CDLP®)
Certified Divorce Lending Professionals are trained to act as financial neutrals in divorce situations, aiming to identify and remove hurdles for both spouses seeking mortgage financing. The specific language in the divorce settlement agreement can impact either party's ability to secure financing post-divorce. A CDLP® helps recognize these obstacles and sets each party up for success.
Divorce Mortgage Planning
Divorce Mortgage Planning is a holistic approach to evaluating mortgage options within the overall financial objectives of divorcing situations. Working directly with the divorce team, a CDLP® understands the intersection of divorce, tax, real estate, and mortgage financing. Their role is to integrate the selected mortgage into the long and short-term financial and investment goals, minimizing taxes, interest expense, and maximizing cash flow.
Early Involvement of a CDLP®
Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process helps set the stage for successful mortgage financing in the future.
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