The Mortgage Interest Tax Deduction After a Refinance

Changes in tax law went into effect on January 1, 2018, with the Tax Cuts and Jobs Act (TCJA). This law greatly affected the tax deduction for interest on a mortgage refinance loan. The changed rules are tighter than they were in 2017. Therefore, make sure you know how it will affect you before you think about refinancing your mortgage.

One of the changes in the new law is that you can no longer use the funds for anything other than your main home or second home. If you use the funds for something else, you won't qualify to claim the mortgage interest tax deduction.

Key Takeaways

• The rules for deducting interest on a mortgage refinance changed with the Tax Cuts and Jobs Act that went into effect on January 1, 2018.
• You can deduct interest on a loan in excess of your existing mortgage if you use the proceeds to buy, build, or substantially improve your home.
• Borrowers can deduct home mortgage interest on the first $750,000 of their home loan unless they’re married filing separately.
• You must itemize to claim this tax deduction.

What Mortgages Are Included

The 2018-2025 deduction rules apply to the refinancing of a first mortgage that was completed after December 15, 2017. Mortgages taken out before this date are grandfathered in.

The TCJA rules about refinancing don't apply unless the initial mortgage went into effect on or before that date. Also, the new loan can't exceed the amount of the original mortgage.

Note

Most of these changes are set to expire at the end of 2025 when the TCJA sunsets unless Congress reauthorizes the Act or renews certain aspects of the law.

How the Money Must Be Used

Whether you are able to deduct interest on a loan in excess of your current mortgage also depends on the amount of the proceeds and how you use them.

Under the rules for home loans, interest payments can be deducted if you use the loan proceeds to buy, build, or greatly improve your primary home or a second home. The change to the law requires that home equity funds be used only for this purpose in order for you to deduct them. Before, the proceeds from the home equity loan could have been used on anything.

Related tax law doesn't allow you to deduct payments of interest on consumer loans when you use the excess amount for any other purpose.

Home Equity Loans vs. Consumer Loans

"Consumer loans" include using the money to pay down credit card bills, auto loans, medical expenses, and other personal debts such as overdue federal and state income taxes.

Note

There's a limited exception for interest on student loans, however, depending on your income.

Before, most borrowers were able to sidestep these restrictions on deductions for consumer interest thanks to the pre-2018 rules for home equity loans.

Limits on Mortgage Indebtedness

You can deduct home mortgage interest on the first $750,000 of the debt. If you're married but filing separate returns, the limit is $375,000, according to the Internal Revenue Service (IRS). A higher limit of $1 million applies if you're deducting mortgage interest from indebtedness that was incurred before December 15, 2017. If married filing separately, that limit is $500,000 for each spouse.

The old rules allowed you to deduct interest on an added $100,000 of the loan, or $50,000 each for married couples filing separate returns.

There is an overall limit of $750,000, or $375,000 each for a married couple filing separately when refinanced loans are partly home acquisition loans and partly home equity loans.

Note

The collateral for the loan must be the home for which the upgrades were made, and the combined debt on the home can no longer exceed its original cost.

Effect of the Alternative Minimum Tax

Yet another rule applies if you pay the alternative minimum tax (AMT). The tricky rules for this tax still allow deductions for interest payments on loans used to buy a home. But they also deny a deduction for interest on home equity loans for first or second homes unless the loan proceeds are used to buy, build, or greatly improve the dwellings.

Itemizing Is Required

There's one more thing to think about: You must itemize in order to claim this tax deduction. This means filing Schedule A with your Form 1040 tax return. You'll use that form to detail each and every tax-deductible dollar you spent all year. You would then claim a deduction for the total.

You might not mind doing a little extra work at tax time if it's going to save you money. But that might not happen because the standard deduction available to taxpayers increased greatly in 2018, also due to the TCJA.

As of 2022, taxpayers can claim the following standard deductions:

• $25,900 for married taxpayers filing jointly (up from $25,100 in 2021).
• $12,950 for single taxpayers or married taxpayers filing separate returns (up from $12,550 in 2021).
• $19,400 for taxpayers who qualify as head of household (up from $18,800 in 2021).

Taxpayers must choose between itemizing or claiming the standard deduction. They can't do both. The total of your itemized deductions must be greater than the amount of the standard deduction you can take. If it isn't, you'd be paying tax on more income than you have to. Both the standard deduction and the total of your itemized deductions subtract from your taxable income.

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

1. Congress.gov. "H.R. 1."
2. Tax Foundation. "The Home Mortgage Interest Deduction."
3. Internal Revenue Service. "Publication 936 (2019), Home Mortgage Interest Deduction."
4. Internal Revenue Service. "Interest on Home Equity Loans Often Still Deductible Under New Law."
5. Dance, Bigelow & Co., PC. "Alternative Minimum Tax (AMT) Strategies."
6. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”
7. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2021."
8. Internal Revenue Service. "Publication 530 Tax Information for Homeowners for Use in Preparing 2020 Returns." Page 2.

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