Mortgage Interest Deduction Limit and Income Phaseout

Mortgage Interest Deduction Limit and Income Phaseout

The mortgage interest deduction limit has decreased since the new Tax Cut & Jobs Act was passed in 2021. In the past, you could deduct mortgage interested on up to $1 million in mortgage indebtedness.

Today, according to the IRS, the maximum mortgage amount you can claim interest on is $750,000 on first or second homes if the loan was taken after Oct 13, 1987. You can also deduct interest on $100,000 for a second mortgage loan used for anything other the purchase of your first or second home.

More specifically, home equity debt means “any loan whose purpose is not to acquire, to construct, or substantially to improve a qualified home“.  Interesting right?  In other words, you can take a $100,000 home equity line of credit to buy a Porsche 911, an incredible home theater system, and do a little landscaping and all the interest is deductible!  No wonder why everybody took out so many Home Equity Lines Of Credit (HELOC)!

You already know that the government is sexist because the maximum mortgage interest deduction limit stays at $750,000 even though both people could have $750,000 mortgages. It’s beyond me why the government thinks two people who want to marry with $750,000 mortgages each, don’t deserve to keep their deductions.

But at any rate, just be aware that if you can afford such a mortgage, you might want to think of this crucial loss of deduction before you get married. With rates averaging 3.25% in 2021,  you could literally lose out on tens of thousands in interest deductions!

Mortgage Interest Deduction Limit And Income Phaseout Killer

Back in 2011, if you have an adjusted gross income of over $166,800, your mortgage interest starts to get phased out. For every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions. Talk about another overly complicated rule the IRS/government has implemented.

Example: You make $266,800 and you have $50,000 in mortgage interest deductions. Take $266,800 – $166,800 = $100,000. Then take $100,000 X 3% = $3,000.  Finally, take $3,000 X 33.3% = $999. You can now only deduct $49,001 ($50,000 – $999) from your income instead of originally $50,000.

Questions and conclusions you should have:

1) Where the hell did the government come up with $166,800 income limit as the start of the phaseout? Obama is targeting raising taxes on singles making over $200,000 and couples making over $250,000 (why not $400,000 since two couples making $200,000 = $400,000!?). Supposedly only 2% of Americans earn over $200,000, so I GUESS the target is somewhat reasonable, even though 45% of Americans pay no federal income taxes.  But $166,800?  Why not $150,000 or $162,300?

2) What is the point of multiplying by 1/3 after multiplying by 3% the income you make over $166,800? Beats the shit out of me!  All one has to do is instead of multiply the “overage income” by 3% then by 33.3%, just multiply the overage income by 1% to get the SAME AMOUNT ($100,000 X 1% = $1,000)! You can see through this example how inefficient the government and our tax system is. They add one extra layer to complicate things. They are just waiting for you to mess up your taxes so they can get someone after you and charge you a penalty.  Smart by them!

3) Why are the tax rules always changing? The reason is because there are always new politicians in office who need to push their agenda to show they aren’t useless tools. If all laws stayed the same, there would really be no need for such a large government. One year we will have $166,800, 3%, and 33.3% and the next year we could have $200,000 and 1%. We need to always be cognizant of the major tax laws.

4)  The ideal income for maximum happiness is not far off of $200,000 a year. If you make $200,000, the government won’t persecute you, and you will only lose $331 in mortgage interest deduction as your income is $33,200 above the $166,800 phaseout cap. That’s not so bad. Unfortunately, you won’t be able to take advantage of the $1,000 Child Tax Credit, which completely phases out at $95,000.

5) The government wants you to be a homeowner. For all intents, providing up to $1,100,000 in mortgage indebtedness interest to deduct from your income is pretty generous since the median home price in America is around $200,000. It’s generally good to go with the government and take advantage of all its offerings, rather than go against the government. In this age of massive monetary stimulus, you should think about owning real assets and take on reasonable debt given inflation will inflate higher your assets and inflate away your debt.

The Mortgage Interest Deduction Limit Is Better Than Nothing

Most countries have no mortgage interest deduction to help lower you taxes. Examples include Canada and Singapore. Even though the mortgage interest deduction limit has declined, it’s still an impressive $750,000. After all, the median home price in America is only around $320,000 as of 2021.

Thankfully, starting in 2016, the phaseout begins with incomes of $254,200 or more and $305,050 for married couples filing jointly. The highest income tax rate is now 39.6% on income over $400,000 as well.

At the margin, the lower mortgage interest deduction will negatively affect higher priced cities that require bigger mortgages. Therefore, to take advantage, I would invest in the heartland of America. Heartland real estate is cheaper, has higher cap rates, and is benefitting from a postive demographic shifts.

The best way to invest in high potential real estate across the country is through real estate crowdfunding.

Two Best Real Estate Crowdfunding Platforms

Check out Fundrise and their eREITs. eREITs give investors a way to diversify their real estate exposure with lower volatility compared to stocks. Income is completely passive and there is much less concentration risk.

If you are an accredited investor and like to invest in individual deals, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities. Both platforms are free to sign up and explore.  

Just remember to always do your research and invest a proper asset allocation. There are no guarantees with any investment.

Mortgage Recommendation

Refinance your mortgage. Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Mortgage rates are down to all-time lows! When banks compete, you win.

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