Trump’s Tax Cuts and Jobs Act of 2017 lowered the Mortgage interest deduction limit from $1,000,000 to $750,000. The current tax law is scheduled to sunset in 2026.
If you have a mortgage or mortgages that exceed 750K you can only use interest paid up to the limit. Let’s look at an example: suppose you have $1,250,000 mortgage at an interest rate of 5%.
You calculate the interest paid the same as before:
$1,250,000 Loan Amount (Exceeds $750,000 Limit) x .05 interest rate = $62,500 Interest Paid
But there is a second step now because you cannot deduct all of that interest. You take the total mortgage and divide it by the limit to give you the ratio of interest paid you are allowed to deduct
Loan Amount / $750,000 = Deductible Interest Paid Ratio
$1,250,000 / $750,000 = 0.6
That means you can take 60% of the interest you paid.
Putting it all together:
$62,500 Interest Paid x 60% Deductible Interest Paid Ratio = $37,500 Mortgage Interest Deduction.