Mortgage Interest Deduction

Question 1

T or F

One can increase their mortgage interest deduction in any given year by prepaying interest due the next year.

Answer 1

False. You cannot engage in tax planning by prepaying mortgage interest. Interest is deductible only in the year it is due.

Question 2

Under the 2018 Tax Cut & Jobs Act, which of the following applies to Home Acquisition Indebtedness?

1. Refers to debt used to buy, build, or substantially improve real property.
2. For purposes of deducting interest costs on Schedule A, is subject to a $750,000 limit for any debt taken after 12/31/17, and to $1,000,000 for any debt existing before that date.
3. For purposes of deducting interest costs on Schedule A, only applies to a maximum of two personal residences.
4. Is defined only by the purpose of the loan, and not to how the loan product is labelled (e.g. A Home Equity Line of Credit could qualify as acquisition debt if used to improve a home)

Answer 2

All apply

Question 3

Under the 2018 Tax Cut & Jobs Act, which of the following applies to Home Equity Indebtedness?

1. Refers to any loan secured by a personal residence not used to buy, build, or substantially improve the property.
2. Is not tax deductible for purpose unless used to finance a trade or business activity, or to purchase investments for income generation.
3. Existing home equity indebtedness in existence on 12/31/17 that was previously deductible (up to $100,000) is not grandfathered in for purposes of deductibility in 2018 under the TCJA.

Answer 3

All

Question 4

What are the exceptions to the non-deductibility rules for home equity indebtedness under the TCJA?

Answer 4

Home equity loans (i.e. non-acquisition debt) used for:

1. Business or trade purposes
2. Investment purposes (including by stock, bonds, or other financial or real assets)

Question 5

To take a tax deduction on home equity debt for investment purposes, what role does “interest tracing” play?

Answer 5

For purposes of deducting the interest, the tax payer must follow the IRS rules for tracing interest to it final purpose. Note that this process is made much easier if borrowed money goes into a separate account used only for buying the intended investments (rather than being commingled with other funds)

Question 6

When using home equity debt to purchase investments (thereby allowing the interest to be deducted), what step can be used to simplify interest tracing?

Answer 6

Place all borrowed funds into a single separate account (typically a separate brokerage account) that will hold only the investments to be purchased.