How to Prepare for Potential Changes to Mortgage Interest Deductions

As a high-net-worth family, you understand that every financial decision can significantly affect your wealth preservation and growth strategies. One area that deserves careful attention is the evolving landscape of mortgage interest deductions. 

The Tax Cuts and Jobs Act (TCJA) of 2017 substantially modified the home mortgage interest deductions through the end of 2025. As we navigate these changes, homeowners and real estate investors must consider the potential impact of the TCJA sunset on their investments and overall tax strategy.

Here are some key strategies to consider:

1. Understand your mortgage terms
2. Consider refinancing options
3. Use home equity loans strategically
4. Accelerate mortgage payments
5. Bundle itemized deductions
6. Work with a qualified financial advisor

In this article, we’ll explore strategies to help optimize your finances amid possible tax changes. In tax planning, especially for high-net-worth families, there are no one-size-fits-all solutions, which is why we recommend consulting a qualified financial advisor who offers high-net-worth financial planning strategies, who can help tailor these insights to your specific needs.

What is the new tax law for mortgage interest deduction?

Is mortgage interest deductible? Yes! According to the IRS, under current laws in 2024, homeowners can deduct interest on mortgage debt up to $750,000 for loans taken out after December 15, 2017 ($375,000 if married filing separately). For loans originated before this date, the limit remains at $1 million ($500,000 if married filing separately).

It’s important to note that this is not a tax credit but a deduction. While a credit directly reduces your tax bill dollar-for-dollar, a deduction lowers your taxable income. The actual benefit depends on your tax bracket — the higher your bracket, the more valuable the deduction.

While the current rules are set until 2025, there’s always the possibility of further legislative changes. So, staying informed about potential changes is going to be crucial for high-earning individuals, as they can impact your financial planning strategies.

How does mortgage interest deduction work?

Essentially, you can deduct the interest paid on your mortgage from your taxable income, potentially lowering your overall tax liability. However, to benefit from this deduction, you must itemize your deductions rather than taking the standard deduction.

Here’s a detailed breakdown of how this deduction operates:

1. Eligibility: To claim the mortgage interest deduction, you must be legally liable for the mortgage, and the mortgage must be secured by your home (either your main home or a second home).
2. Itemization requirement: You can only claim the mortgage interest deduction if you itemize your deductions on Schedule A of Form 1040. This means forgoing the standard deduction, which for the 2024 tax year is $14,600 for single filers and $29,200 for married couples filing jointly.
3. Calculating the deduction: The amount you can deduct is the interest you actually paid during the tax year, not the total amount you owe. Your lender will provide you with Form 1098, which reports the interest you paid for the year.
4. Home equity loans: Interest on home equity loans or lines of credit is only deductible if the loan was used to buy, build, or substantially improve the home that secures the loan, and when combined with your first mortgage, doesn’t exceed the debt limit.
5. Multiple homes: You can deduct mortgage interest on two qualified homes. If you have mortgages on more than two properties, you must choose which two will be used for the deduction.
6. Tax benefit: The actual benefit of the deduction depends on your marginal tax rate. For example, if you’re in the 37% tax bracket, each $1,000 of mortgage interest you deduct could save you $370 in taxes.

For those with complex financial situations, the interplay between the mortgage interest deduction and other aspects of your tax strategy can be intricate. Therefore, it’s often beneficial to work with a qualified tax professional or financial advisor who can help make sure you’re maximizing the benefit of this deduction within your overall financial plan.

Six strategies to help prepare for potential reductions in deductions

1. Understand your mortgage terms

This is particularly important for high-net-worth individuals who may have multiple properties or high-value mortgages. By knowing exactly how much interest you’re paying and how it affects your tax situation, you can better prepare for any changes in tax laws or your financial circumstances.

For Texas residents, it’s important to note that while there’s no state income tax or Texas capital gains tax on real estate, you’ll still need to consider federal capital gains tax on profitable real estate sales.

2. Consider refinancing options

If you have multiple properties or a mortgage that exceeds the deduction limit, restructuring your debt might help you stay within deduction limits. Refinancing can also potentially lower your interest rate, helping to reduce your overall interest payments.

When considering refinancing, weigh the potential tax benefits against the costs of refinancing and how it fits into your overall financial strategy. This is especially important when investing in the real estate sector, as the tax implications can significantly affect your returns.

3. Use home equity loans strategically

Interest on home equity loans used for home improvements may still be deductible under the homeowner’s interest deduction. This can be a valuable strategy for increasing your property value while also maintaining tax benefits.

However, be cautious about using home equity loans for other purposes, as the interest may not be deductible if the funds aren’t used for home improvements. Always consider the impact on your overall financial picture, including how it might affect your ability to invest in other areas, such as stocks.

Learn more about the difference between investing in real estate vs. stocks

4. Accelerate mortgage payments

Making extra payments towards your mortgage principal can help reduce overall interest paid and potentially increase your deductible amount in the short term. This strategy can be particularly effective if you’re close to paying off your mortgage and want to maximize your deductions in the near term.

Accelerating payments can also help prepare you for potential reductions in the mortgage interest deduction limit. By reducing your overall mortgage debt, you can decrease your reliance on the mortgage interest deduction as a tax-saving strategy.

5. Bundle itemized deductions

Combine your mortgage interest with other deductions to exceed the standard deduction threshold. This might include property taxes, charitable contributions, and other eligible expenses. By bundling these deductions, you can work to maximize your tax savings in years when you itemize.

This strategy requires careful planning and may involve timing certain expenses or contributions to maximize your deductions in specific tax years. It’s an important consideration when reassessing your budget in light of potential changes to the mortgage interest deduction.

6. Work with a qualified financial advisor

When considering whether real estate is still a good investment, remember that despite changes in tax laws, real estate can offer benefits beyond just the mortgage interest deduction. 

That said, the complexity of tax laws and their interaction with various investment strategies necessitates professional guidance. A qualified financial advisor can help you stay ahead of potential changes, make more informed decisions, and maintain a robust and adaptable financial strategy in the face of evolving tax laws and economic conditions.

Is your financial strategy prepared to hedge any potential changes to the mortgage interest deduction limits?

The TCJA of 2017 brought significant changes to the mortgage interest deduction. However, many of these provisions are set to expire, or “sunset,” after 2025 unless Congress acts to extend them. If you’re not preparing your tax strategies for these changes, now is the time to start. 

At Avidian Wealth Solutions, we understand the complexities of tax law and its impact on high-net-worth investors. Our team of experienced advisors can help you analyze your current mortgage situation, develop strategies to help maximize your mortgage interest deductions within the current limits, prepare for potential changes post-2025, and more.

Don’t let changing tax laws catch you off guard. Schedule a conversation with one of our advisors in Houston, Austin, Sugar Land, or The Woodlands today!

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