I offer the following story as a way of clarifying the new 2018 rules on mortgage interest.
Jim bought a personal boat in May 2018. It qualifies as a second home. He has a $600,000 personal mortgage on his 2010 home and a $400,000 loan on his 2018 boat.
Jim can deduct mortgage interest on his principal residence and one other residence of his choice. The Tax Cuts and Jobs Act (TCJA) tax reform didn’t change this double residence deal, but the new tax reform does contain a bad-news hurdle that Jim will experience.
Jim’s interest deduction is tricky under the TCJA because Jim bought his home before December 15, 2017, and his boat after that date:
- For debt incurred on or before December 15, 2017, you can still deduct interest on up to $1,000,000 ($500,000 married, filing separately) of acquisition debt.
- But for debt incurred after December 15, 2017, you can deduct interest on up to only $750,000 ($375,000 married, filing separately) of acquisition debt.
The TCJA has a special rule when you have acquisition debt subject to the two different limits: you’ll subtract the pre-December 15, 2017, debt amount from the $750,000/$375,000 limit, and the difference is the mortgage limit on your post–December 15, 2017, debt.
In Jim’s case, he can deduct all the interest from his $600,000 home mortgage and the interest from $150,000 of his boat debt. (The $750,000 limit minus the $600,000 debt from Jim’s home mortgage gives him the $150,000 limit on his $400,000 of boat debt.)
The new limits on qualifying mortgages are in place for eight years, from 2018 through 2025.