H.R. 1, originally known as the “Tax Cuts and Jobs Act,” makes certain changes to mortgage interest and property interest deductions. These changes will affect taxpayers who own real property, including homeowners and companies that own their business properties.

Mortgage Interest Deduction

Current law provides that “qualified residence interest” is generally allowed as an itemized deduction. Qualified residence interest includes interest paid or accrued on debt incurred in acquiring, constructing, or substantially improving a taxpayer’s residence (“acquisition indebtedness”) and home equity indebtedness.  

The deduction available for mortgage interest is now limited by reducing the amount of debt that can be treated as acquisition indebtedness from the current level of $1,000,000 to $750,000. This limit applies to debt incurred after December 15, 2017; the limit on deducting interest on acquisition indebtedness for debt incurred prior to December 15, 2017 remains at $1,000,000.  

Property Tax Deduction

With respect to an individual, the new law limits the deduction for state, local and foreign property taxes only to such taxes when they are paid or accrued in carrying on a trade or business.  

There is an exception allowing an individual taxpayer to claim an itemized deduction of up to $10,000 (in the aggregate), not indexed for inflation, for state and local property taxes not incurred in carrying on a trade or business, and state and local income, war profits and excess profits taxes (or sales taxes in lieu of income taxes). Foreign real property taxes would not be deductible under this exception.

With respect to a business, property taxes paid by a pass-through entity remain deductible.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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