facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Military Finances 201: Remember, All Your Mortgage Interest Might Not be Deductible

Taxes

If anything good came out of 2020, it was the ability to significantly reduce the interest rate on your mortgage. I'm pretty sure a lot of people did. And based on tax returns I'm doing this year, many don't understand the full tax consequences of doing so. That is because the Tax Cuts and Jobs Act (TCJA) otherwise known as the new tax law. Let's take a look at how the law changed the mortgage interest deduction and then we'll take a look at how it might affect you.

How the TCJA Changed the Mortgage Interest Tax Deduction

Prior to the TCJA both acquisition and home equity interest was deductible (with some limits). The TCJA eliminated the deduction for home equity interest and lowered the loan value to $750,000 on which you can deduct acquisition debt. To understand how this affects you, we need to define acquisition and equity debt. To start with, it has nothing to do with what the loan is called. A home equity loan can be acquisition debt and a portion of a first mortgage can be equity debt. The determination on type of debt is determined by how the loan is used. If the proceeds of the loan are used to acquire or improve a residence, then the proceeds are considered acquisition debt. If the proceeds are used for any other purpose, the proceeds are considered home equity debt.

How the Changes to the Mortgage Interest Tax Deduction Affect You

There are two likely scenarios that I can envision and one of them I'm seeing a bunch of one of them already.

  • Mortgage Refinance. This is the one I'm seeing most often. Let's say you refinanced your loan in 2020 and you didn't want to pay for your closing costs with cash. So, you refinanced them. So your new loan balance is higher than your old loan balance. The amount of the new loan that equals the balance of the old loan that you paid off is acquisition debt. But, the amount used to pay closing costs was not used to purchase or improve your property. Therefore, that portion of the debt is home equity debt and the interest on it is not deductible.
  • Home Equity Debt Used to Improve Property. Let's say that you took out a home equity line of credit (HELOC) and use it to add an in-law suite so your mother can move in. When you pull out your tax software to do your return, it asks if  the debt is home equity debt. You know your loan is a home equity loan and you answer yes. If you do that, the software will not include the interest on the debt in your deductible interest.

Things to Keep in Mind

You need to do the calculation to determine how much of your interest is deductible if you did a refinance (your software may do the calculation for you). The IRS has some worksheets to help you work through the calculations.

The good news is the equity interest gets paid off first, so this is a problem that will eventually go away.

Military Finances are Different

While this issue applies to all taxpayers, there are a lot of places in the Tax Code and in finances in general where military members and veterans are treated differently than civilians. We think you should work with a financial advisor or planner that deals with these differences each and every day. If that makes sense to you, give us a call or schedule a free initial consultation.


If you found this article useful, you might like the following blog posts:

2021 by the Numbers


Retired Military Finances 401: The Widow(er)'s Penalty


Retired Military Finances 301: Just When You Thought The Tax Code Couldn't Get More Complicated






Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.