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1 1 (October 22, 2024)

handle is hein.crs/goverbb0001 and id is 1 raw text is: Congressional Research Service Informing the IegisI9tive debate since 1914 0 October 22, 2024 Key Issues in Tax Policy: The Mortgage Interest Deduction The mortgage interest deduction is of interest to policymakers due to its association with homeownership. The mortgage interest deduction is also of interest because it is one of the largest tax benefits available to homeowners in terms of forgone federal tax revenue. For FY2024, the Joint Committee on Taxation (JCT) estimates that the deduction will reduce revenues by $25.4 billion: the only larger housing-related tax expenditure is the exclusion for capital gains on the sale of a principal residence, at a FY2024 revenue cost of $38.1 billion. This In Focus provides a brief overview of the mortgage interest deduction. P.L. 115-97, often referred to as the Tax Cuts and Jobs Act (TCJA), changed the tax treatment of mortgage interest for tax years 2018 through 2025. Although the mortgage interest deduction is still generally available, the TCJA reduced the maximum mortgage balance eligible for the deduction and restricted the deduction of interest associated with home equity loans. The TCJA also temporarily increased the standard deduction, which reduced the number of taxpayers who claim itemized deductions generally, including for mortgage interest. After the expiration of temporary TCJA provisions, the JCT estimates that the mortgage interest deduction will reduce revenues by $81.3 billion in FY2026 and $100.6 billion in FY2027. Summary of Current Law A taxpayer may claim an itemized deduction for qualified residence interest, which includes interest paid on a mortgage secured by a principal residence and a second residence. The amount of interest that is deductible depends on when the mortgage debt was incurred. For mortgage debt incurred on or before December 15, 2017, the deduction is limited to the interest incurred on the first $1 million ($500,000 for married filing separately) of combined mortgage debt. For mortgage debt incurred after December 15, 2017, the limit is $750,000 ($375,000 for married filing separately). If a taxpayer has mortgage debt exceeding the applicable mortgage limit ($750,000 or $1 million), he or she may still claim a deduction for a percentage of interest paid equal to the applicable mortgage limit divided by the remaining mortgage balance. For example, a homeowner whose mortgage was originated after December 15, 2017, and has a balance of $1 million could deduct 75% ($750,000 divided by $1 million) of the interest payments. Refinanced mortgage debt is treated as having been incurred on the origination date of the original mortgage for purposes of determining the applicable mortgage limit ($750,000 or $1 million). The balance of the new loan resulting from the refinance, however, may not exceed the balance of the original loan. This may occur, for example, when a homeowner cashes out equity in the home by obtaining a larger loan than is necessary to pay off the current mortgage balance. For purposes of the deduction, mortgage debt includes home equity loans secured by a principal or second residence that are used to buy, build, or substantially improve a taxpayer's home. Mortgage debt does not include home equity loans when the proceeds are used for purposes unrelated to the property securing the loan. For example, interest associated with a home equity loan that is used to pay off a credit card balance, go on a vacation, or send a child to college does not qualify for the mortgage interest deduction. The restrictions on the use of home equity loans apply irrespective of when the loan was originated. After 2025, the mortgage interest deduction will revert to the law that existed prior to TCJA. CompariSOn to Prior Law Under prior law, a homeowner was allowed an itemized deduction for the interest paid on the first $1 million of combined mortgage debt associated with a primary or secondary residence. As with current law, a homeowner could deduct a percentage of interest paid if the mortgage balance exceeded the $1 million limit. Additionally, a homeowner was allowed to deduct the interest on the first $100,000 of home equity debt regardless of whether or not the taxpayer incurred the debt to finance costs associated with the home. For example, under prior law, a homeowner could use a home equity loan to purchase a boat, pay for a child's college, cover medical costs, or any number of other things not involving the property that secured the loan and still deduct the associated interest. mpact of the TCJA Inpact on Homeowners The reduced mortgage limits under TCJA decrease the amount of interest that would otherwise be deducted under prior law, though the reduction itself will likely not have a significant impact on the number of homeowners claiming the deduction. However, other changes enacted by TCJA, specifically the near doubling of the standard deduction and the $10,000 limit placed on the deduction for state and local income taxes (SALT), are estimated to have reduced the itemization rate generally, and will therefore reduce the number of homeowners claiming the mortgage interest deduction. The most recent data from the Internal Revenue Service show that the overall itemization rate fell from 30.6% in 2017 to 9.2% in 2021. Because taxpayers must

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