Apply New York's pre-TCJA mortgage debt limits to the interest deduction

changelog.d/ny-pre-tcja-mortgage-interest.fixed.md

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+Apply New York's pre-TCJA mortgage debt limits ($1,000,000 acquisition and $100,000 home equity debt) to its itemized interest deduction from 2018, with new home value and non-acquisition debt inputs.

policyengine_us/parameters/gov/states/ny/tax/income/deductions/itemized/interest/home_acquisition_debt_limit.yaml

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+description: New York limits the home acquisition debt on which mortgage interest is deductible to this amount, reduced by any grandfathered debt, based on filing status.
+SINGLE:
+  2018-01-01: 1_000_000
+JOINT:
+  2018-01-01: 1_000_000
+SEPARATE:
+  2018-01-01: 500_000
+HEAD_OF_HOUSEHOLD:
+  2018-01-01: 1_000_000
+SURVIVING_SPOUSE:
+  2018-01-01: 1_000_000
+metadata:
+  propagate_metadata_to_children: true
+  breakdown: filing_status
+  unit: currency-USD
+  period: year
+  label: New York home acquisition debt limit
+  reference:
+    # N.Y. Tax Law 615(a) computes New York itemized deductions as they
+    # existed immediately before P.L. 115-97, so the IRC 163(h)(3)(B)(ii)
+    # limit applies rather than the IRC 163(h)(3)(F) limit for later debt.
+    - title: New York Tax Law 615(a)
+      href: https://www.nysenate.gov/legislation/laws/TAX/615
+    - title: "L.2018, chapter 59 (S7509C), Part JJ, sections 3 and 7 #page 42-43"
+      href: https://legislation.nysenate.gov/pdf/bills/2017/S7509C#page=42
+    - title: 26 U.S. Code 163(h)(3)(B)(ii) (2017 edition)
+      href: https://www.govinfo.gov/content/pkg/USCODE-2017-title26/html/USCODE-2017-title26-subtitleA-chap1-subchapB-partVI-sec163.htm
+    - title: New York State Department of Taxation and Finance, Itemized deductions (2025), Interest you paid
+      href: https://www.tax.ny.gov/pit/file/itemized-deductions-2025.htm#interest

policyengine_us/parameters/gov/states/ny/tax/income/deductions/itemized/interest/home_equity_debt_limit.yaml

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+description: New York limits the home equity debt on which mortgage interest is deductible to this amount, based on filing status.
+SINGLE:
+  2018-01-01: 100_000
+JOINT:
+  2018-01-01: 100_000
+SEPARATE:
+  2018-01-01: 50_000
+HEAD_OF_HOUSEHOLD:
+  2018-01-01: 100_000
+SURVIVING_SPOUSE:
+  2018-01-01: 100_000
+metadata:
+  propagate_metadata_to_children: true
+  breakdown: filing_status
+  unit: currency-USD
+  period: year
+  label: New York home equity debt limit
+  reference:
+    # N.Y. Tax Law 615(a) computes New York itemized deductions as they
+    # existed immediately before P.L. 115-97, so the IRC 163(h)(3)(C)(ii)
+    # limit applies and IRC 163(h)(3)(F) does not suspend it.
+    - title: New York Tax Law 615(a)
+      href: https://www.nysenate.gov/legislation/laws/TAX/615
+    - title: "L.2018, chapter 59 (S7509C), Part JJ, sections 3 and 7 #page 42-43"
+      href: https://legislation.nysenate.gov/pdf/bills/2017/S7509C#page=42
+    - title: 26 U.S. Code 163(h)(3)(C)(ii) (2017 edition)
+      href: https://www.govinfo.gov/content/pkg/USCODE-2017-title26/html/USCODE-2017-title26-subtitleA-chap1-subchapB-partVI-sec163.htm
+    - title: "2017 IRS Publication 936, Home equity debt limit and Table 1 #page 10-11"
+      href: https://www.irs.gov/pub/irs-prior/p936--2017.pdf#page=10

policyengine_us/tests/core/test_ny_mortgage_debt_limit_invariants.py

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+"""Invariants for New York's pre-TCJA mortgage debt limits.
+
+N.Y. Tax Law 615(a) computes New York itemized deductions as they existed
+immediately before P.L. 115-97, so from 2018 New York keeps the IRC
+163(h)(3)(B)-(D) limits: grandfathered debt, incurred on or before October
+13, 1987, has no dollar limit and reduces the $1,000,000 acquisition-debt
+limit ($500,000 married filing separately); acquisition debt above that limit
+and non-acquisition debt count as home equity debt up to $100,000 ($50,000),
+and on each home only up to its fair market value less the debt on it
+treated as acquisition or grandfathered debt. A fair market value of 0 means
+unknown: the home counts as worth at least the debt on it, so only the dollar
+limit applies.
+
+Hypothesis draws two homes, each with an acquisition balance and vintage,
+non-acquisition debt and a fair market value, around every cutoff and limit,
+and checks _ny_qualified_loan_limit:
+
+1. Differential: it equals an independent restatement in the statute's
+   order, which places the acquisition limit on each home by a separate loop.
+   The restatement shares the acquisition limit between homes the same way
+   (in proportion to each home's other acquisition debt), so it cannot catch
+   a wrong sharing rule.
+2. Bounds: grandfathered debt <= New York limit <= total debt, and the New
+   York limit is at least PE's federal limit for the same acquisition loans.
+3. Defaults: with no fair market value and no non-acquisition debt (the
+   input defaults), the limit is line 6 plus the acquisition debt above it,
+   up to the home equity debt limit. The Hawaii helper gives the same
+   limit.
+4. Order: swapping the two homes never changes the limit.
+5. Monotone: a higher positive fair market value never lowers the limit.
+6. Unknown value: setting every fair market value to 0 (unknown) never
+   lowers the limit.
+
+For _ny_allowed_interest, PE's federal share for the same loans splits
+interest on two homes with no non-acquisition debt into the federally
+deductible and non-deductible parts. The New York result lies between the
+federal deduction and the interest paid, and equals the federal deduction
+when federal law disallows nothing. The federal bound follows from the
+limits, not from a floor.
+
+For _ny_deductible_share: the share is at least the unrounded ratio and at
+least the ratio rounded half up to three places, at most one, and exceeds the
+unrounded ratio by no more than .0005.
+
+The test reads the limits from the New York and federal parameters for
+every filing status in 2018, 2025 and 2026. The properties cannot pass
+trivially: the differential compares against a separately written per-home
+calculation, and the default and bound checks fail if the fair market value
+test, the home equity limit or the acquisition limit is dropped or reversed.
+
+These are for-all properties of the helpers, which YAML cannot state. The
+policy outcomes are checked in ny_mortgage_interest_deduction.yaml.
+"""
+
+import math
+from fractions import Fraction
+
+import numpy as np
+from hypothesis import example, given, settings
+from hypothesis import strategies as st
+
+from policyengine_us.system import system
+from policyengine_us.variables.gov.states.hi.tax.income.deductions.itemized.hi_mortgage_interest_deduction import (
+    _hi_qualified_loan_limit,
+)
+from policyengine_us.variables.gov.states.ny.tax.income.taxable_income.deductions.itemized.ny_mortgage_interest_deduction import (
+    _ny_allowed_interest,
+    _ny_deductible_share,
+    _ny_qualified_loan_limit,
+)
+from policyengine_us.variables.household.expense.tax_unit.mortgage_interest_structure import (
+    _debt_by_vintage,
+    _qualified_loan_limit,
+)
+
+GRANDFATHERED_YEAR = 1987
+PRE_TCJA_YEAR = 2017
+FILING_STATUSES = (
+    "SINGLE",
+    "JOINT",
+    "SEPARATE",
+    "HEAD_OF_HOUSEHOLD",
+    "SURVIVING_SPOUSE",
+)
+TAX_YEARS = (2018, 2025, 2026)
+
+
+def parameter_limits(year, filing_status):
+    p = system.parameters(f"{year}-01-01")
+    ny = p.gov.states.ny.tax.income.deductions.itemized.interest
+    federal = p.gov.irs.deductions.itemized.interest.mortgage
+    return (
+        (
+            float(ny.home_acquisition_debt_limit[filing_status]),
+            float(ny.home_equity_debt_limit[filing_status]),
+        ),
+        (
+            float(federal.pre_tcja_cap[filing_status]),
+            float(federal.cap[filing_status]),
+        ),
+    )
+
+
+LIMITS = {
+    (year, filing_status): parameter_limits(year, filing_status)
+    for year in TAX_YEARS
+    for filing_status in FILING_STATUSES
+}
+TOLERANCE = 0.01
+
+YEARS = (0, 1960, 1987, 1988, 2017, 2018, 2025)
+BOUNDARY_AMOUNTS = (
+    0,
+    1,
+    50_000,
+    100_000,
+    375_000,
+    500_000,
+    550_000,
+    750_000,
+    1_000_000,
+    1_100_000,
+)
+amounts = st.one_of(
+    st.sampled_from(BOUNDARY_AMOUNTS),
+    st.integers(0, 3_000_000),
+).map(float)
+# (acquisition balance, origination year, non-acquisition debt, fair market value)
+homes = st.tuples(amounts, st.sampled_from(YEARS), amounts, amounts)
+
+
+def grandfathered(year):
+    return 0 < year <= GRANDFATHERED_YEAR
+
+
+def model_limit(pair, limits):
+    grandfathered_debts = [
+        np.array([balance if grandfathered(year) else 0.0])
+        for balance, year, _, _ in pair
+    ]
+    other_debts = [
+        np.array([0.0 if grandfathered(year) else balance])
+        for balance, year, _, _ in pair
+    ]
+    return float(
+        _ny_qualified_loan_limit(
+            grandfathered_debts,
+            other_debts,
+            [np.array([home[2]]) for home in pair],
+            [np.array([home[3]]) for home in pair],
+            *limits,
+        )[0]
+    )
+
+
+def statute(pair, limits):
+    """IRC 163(h)(3)(B)(ii), (C) and (D) before P.L. 115-97, home by home."""
+    acquisition_limit, home_equity_limit = limits
+    old = sum(balance for balance, year, _, _ in pair if grandfathered(year))
+    other = sum(balance for balance, year, _, _ in pair if not grandfathered(year))
+    # (D)(ii): grandfathered debt reduces the $1,000,000 limit.
+    other_allowed = min(other, max(0.0, acquisition_limit - old))
+    home_equity = 0.0
+    for balance, year, non_acquisition, fair_market_value in pair:
+        if grandfathered(year):
+            on_home, excess = balance, 0.0
+        else:
+            on_home = other_allowed * balance / other if other > 0 else 0.0
+            excess = balance - on_home
+        # (C)(i): no more than fair market value less acquisition debt. A
+        # value of 0 means unknown and sets no such limit.
+        room = (
+            max(0.0, fair_market_value - on_home) if fair_market_value > 0 else math.inf
+        )
+        home_equity += min(excess + non_acquisition, room)
+    # (C)(ii): the aggregate home equity limit.
+    return old + other_allowed + min(home_equity, home_equity_limit)
+
+
+def federal_limit(pair, limits):
+    debt = _debt_by_vintage(
+        [np.array([home[0]]) for home in pair],
+        [np.array([home[1]]) for home in pair],
+        GRANDFATHERED_YEAR,
+        PRE_TCJA_YEAR,
+    )
+    return float(_qualified_loan_limit(*debt, *limits)[0])
+
+
+SETTINGS = dict(max_examples=400, deadline=None, derandomize=True)
+
+
+def test_new_york_limits_are_the_statutory_amounts():
+    for (year, filing_status), (ny_limits, _) in LIMITS.items():
+        expected = (
+            (500_000, 50_000) if filing_status == "SEPARATE" else (1_000_000, 100_000)
+        )
+        assert ny_limits == expected, (year, filing_status)
+
+
+@settings(**SETTINGS)
+@given(first=homes, second=homes, status=st.sampled_from(sorted(LIMITS)))
+def test_new_york_qualified_loan_limit_properties(first, second, status):
+    ny_limits, federal_limits = LIMITS[status]
+    pair = [first, second]
+    limit = model_limit(pair, ny_limits)
+    old = sum(home[0] for home in pair if grandfathered(home[1]))
+    total = sum(home[0] + home[2] for home in pair)
+
+    # 1. Differential.
+    assert abs(limit - statute(pair, ny_limits)) <= TOLERANCE
+    # 2. Bounds.
+    assert old - TOLERANCE <= limit <= total + TOLERANCE
+    assert limit >= federal_limit(pair, federal_limits) - TOLERANCE
+    # 3. Defaults: no fair market value and no non-acquisition debt.
+    acquisition_limit, home_equity_limit = ny_limits
+    defaults = [(home[0], home[1], 0.0, 0.0) for home in pair]
+    acquisition = sum(home[0] for home in pair)
+    line_6 = min(max(old, acquisition_limit), acquisition)
+    expected = line_6 + min(acquisition - line_6, home_equity_limit)
+    assert abs(model_limit(defaults, ny_limits) - expected) <= TOLERANCE
+    hawaii = float(
+        _hi_qualified_loan_limit(
+            np.array([old]), np.array([acquisition - old]), *ny_limits
+        )[0]
+    )
+    assert abs(expected - hawaii) <= TOLERANCE
+    # 4. Order.
+    assert abs(limit - model_limit([second, first], ny_limits)) <= TOLERANCE
+    # 5. Monotone in a positive fair market value.
+    richer = [
+        (home[0], home[1], home[2], home[3] + 250_000 if home[3] > 0 else 0.0)
+        for home in pair
+    ]
+    assert model_limit(richer, ny_limits) >= limit - TOLERANCE
+    # 6. An unknown value (0) never lowers the limit.
+    unknown = [(home[0], home[1], home[2], 0.0) for home in pair]
+    assert model_limit(unknown, ny_limits) >= limit - TOLERANCE
+
+
+@settings(**SETTINGS)
+@given(
+    interest=amounts,
+    first=homes,
+    second=homes,
+    status=st.sampled_from(sorted(LIMITS)),
+)
+def test_new_york_allowed_interest_without_non_acquisition_debt(
+    interest, first, second, status
+):
+    ny_limits, federal_limits = LIMITS[status]
+    pair = [(home[0], home[1], 0.0, home[3]) for home in (first, second)]
+    acquisition = sum(home[0] for home in pair)
+    if acquisition > 0:
+        federal_share = min(1.0, federal_limit(pair, federal_limits) / acquisition)
+    else:
+        federal_share = 1.0
+    deductible = interest * federal_share
+    non_deductible = interest - deductible
+    share = _ny_deductible_share(
+        np.array([model_limit(pair, ny_limits)]), np.array([acquisition])
+    )
+    allowed = float(
+        _ny_allowed_interest(
+            np.array([deductible]),
+            np.array([non_deductible]),
+            np.array([0.0]),
+            share,
+        )[0]
+    )
+    assert deductible - TOLERANCE <= allowed <= interest + TOLERANCE
+    if non_deductible == 0:
+        assert allowed == deductible
+
+
+@settings(**SETTINGS)
+@given(limit=amounts, debt=amounts)
+@example(limit=1_001.0, debt=2_000.0)
+def test_new_york_deductible_share_is_the_larger_method(limit, debt):
+    debt = max(debt, 1.0)
+    limit = min(limit, debt)
+    share = float(_ny_deductible_share(np.array([limit]), np.array([debt]))[0])
+    ratio = limit / debt
+    # Rounded half up to three places, computed exactly.
+    exact = Fraction(int(limit), int(debt))
+    rounded = math.floor(exact * 1_000 + Fraction(1, 2)) / 1_000
+    assert share >= ratio - 1e-12
+    assert share >= rounded - 1e-12
+    assert share <= 1 + 1e-12
+    assert share - ratio <= 0.0005 + 1e-12