The “American Dream” has long included the opportunity to own your own home, which the Federal government incentivizes and partially subsidizes by offering a tax deduction for mortgage interest. To the extent that the taxpayer itemizes their deductions – for which the mortgage interest deduction itself often pushes them over the line to itemize – the mortgage interest is deductible as well.
Since the Tax Reform Act of 1986, the mortgage deduction had a limit of only deducting the interest on the first $1,000,000 of debt principal that was used to acquire, build, or substantially improve the primary residence (and was secured by that residence). Interest on any additional mortgage debt, or debt proceeds that were used for any other purpose, was only deductible for the next $100,000 of debt principal (and not deductible at all for AMT purposes).
Under the Tax Cuts and Jobs Act of 2017, though, the debt limit on deductibility for acquisition indebtedness is reduced to just $750,000 (albeit grandfathered for existing mortgages under the old higher $1M limit), and interest on home equity indebtedness is no longer deductible at all starting in 2018.
Notably, though, the determination of what is “acquisition indebtedness” – which remains deductible in 2018 and beyond – is based not on how the loan is structured or what the bank (or mortgage servicer) calls it, but how the mortgage proceeds were actually used. To the extent they were used to acquire, build, or substantially improve the primary residence that secures the loan, it is acquisition indebtedness – even in the form of a HELOC or home equity loan. On the other hand, even a “traditional” 30-year mortgage may not be fully deductible interest if it is a cash-out refinance and the cashed out portion was used for other purposes.
Unfortunately, the existing Form 1098 reporting does not even track how much is acquisition indebtedness versus not – despite the fact that only acquisition mortgage debt is now deductible. Nonetheless, taxpayers are still responsible for determining how much is (and isn’t) deductible for tax purposes. Which means actually tracking (and keeping records of) how mortgage proceeds are/were used when the borrowing occurred, and how the remaining principal has been amortized with principal payments over time!