Maximizing the tax benefits of mortgage interest, home equity loans

Understanding options with residential deductions is a great way to add value for clients

Oct 28, 2017 @ 12:06 am

By Tim Steffen

The tax reform framework recently released by President Donald J. Trump proposes eliminating most itemized deductions, except for those regarding mortgage interest and charitable contributions. It also nearly doubles the standard deduction, meaning only those individuals who have large mortgages and/or are very charitable will likely continue to itemize their deductions.

Conversely, the latest IRS statistics estimate that 32.7 million tax returns were filed in 2015 claiming the deduction for mortgage interest. That would certainly decrease under the proposed change, but those who remain are likely your biggest clients. And while tax reform is a priority for the president, there's no certainty what the final bill will include or when it will be effective.

So don't discount this seemingly basic yet complicated deduction. Although it's a long-standing part of our tax code, recent changes create planning opportunities.

The Basics: The first test when deducting mortgage interest — and the rule that's most likely to trip up financial advisers — is determining how the loan is secured. It's not unusual for clients who want to avoid securing a traditional mortgage, especially when they are building a new home, to consider a short-term loan secured by their investment portfolio.


However, IRS Publication 936, Home Mortgage Interest Deduction, states that to be deductible as mortgage interest, the loan must be secured by the home. With any other form of security, the interest isn't considered qualified mortgage interest and is therefore nondeductible. That interest also isn't deductible as investment interest, since the loan proceeds weren't used to purchase investments. Bottom line: Clients shouldn't use their investment portfolio to secure a home loan.

Assuming the loan qualifies for a deduction, then your client should consider the size of the loan. Only interest on the first $1 million of "home acquisition debt" is considered deductible. The interest on any debt beyond that level is not deductible. And even though they can deduct the interest on loans for a primary residence and a second home, the $1 million exclusion is a combined amount across both homes.

One twist on this rule — last year the IRS decided that two unmarried individuals who co-own the same home can each deduct the interest on $1 million of debt. Married couples only get a single $1 million amount. Divorce isn't a popular tax planning technique, but it could be a way to maximize the mortgage interest deduction.

Home Equity Loans: A deduction is also available for interest paid on up to $100,000 of debt not considered acquisition debt. This is ideal for those clients who maintain a home equity line of credit, or use their equity to finance a car or other purchase. One caveat: If the equity loan proceeds aren't used to buy, build or improve the home, the interest is not deductible for alternative minimum tax purposes.

Multiple Homes

On the other hand, in 2012 the IRS ruled that the $100,000 doesn't have to be a true home equity loan. If the acquisition loan exceeds $1 million, the next $100,000 of that debt can be treated as home equity debt. In other words, the $1 million limit is really $1.1 million.

Multiple Homes: Interest is deductible on loans used to acquire a primary residence and a second home, and the rules are flexible about what qualifies as the second home. This can include a home, condo, mobile home and even a boat — as long as it has sleeping, cooking and bathroom facilities.

For those clients with multiple homes, only one home can be the second home each year, but there's also flexibility in changing that when homes are bought or sold during the year. Plus, it's possible to change which home is the second home from year to year.

Although it's uncertain how our tax system will look in the near future, understanding options with the mortgage interest deduction is a great way to add value for clients.


What do you think?

View comments

Upcoming event

Jul 09


Boston Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print