The Tax Blotter is a round-up of recent tax court cases and legislation.
The new tax law—known as the “One Big Beautiful Bill Act” (OBBBA)—generally extends the current rules for mortgage interest deductions, with certain modifications.
Stay below threshold. Prior to the Tax Cuts and Jobs Act (TCJA), you could deduct mortgage interest paid on “acquisition debt” of up to $1 million. Acquisition debt is debt where the proceeds are used to “buy, build or substantially improve” a principal residence or one other home like a vacation home. The TCJA lowered the threshold to $750,000, but it was scheduled to revert to $1 million after 2025. Update: The OBBBA extends the lower threshold—permanently. Reminder: Mortgage interest is only deductible by taxpayers who itemize on their personal return.
Convert to acquisition debt. The TCJA also suspended the deduction allowed for interest paid on the first $100,000 of home equity debt from 2018 through 2025. Home equity debt is any debt not classified as acquisition debt. Now, under the OBBBA, the ban on deductions for home equity debt is permanent. Nevertheless, you can salvage a deduction with some clever tax maneuvering. If you take out a loan and use the proceeds to “substantially improve” the home, such as installing an in-ground pool or deck. it qualifies as acquisition debt. Thus, payments are deductible as mortgage interest subject to the current threshold.
Secure tax protection. Previously, a deduction for mortgage insurance premiums was temporarily allowed, subject to a phase-out beginning at $100,000 of modified adjusted gross income (MAGI). This special deduction was only available for mortgage insurance paid on acquisition debt for a principal residence. However, when this tax break expired after 2021 it was never renewed—until now. Under the OBBBA, you may deduct mortgage insurance paid or incurred after 2024 as qualified mortgage interest, based on the usual $750,000 threshold. Expect more guidance from the IRS about this modified tax break.
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Tags: Income Taxes, mortgage interest, obbba, Taxes
