Keep that HELOC?

Posted February 8, 2018

We are getting many questions on the Tax Cuts and Jobs Act of 2017 which is now law. Unfortunately one goal it didn’t achieve was simplification, the bill actually adds hundreds of pages to our tax laws and complexity. One item in particular has generated a lot of questions: changes in the mortgage and home equity loan interest deduction. Note – the IRS is in the process of writing the actual rules, but in general, through 2017 one could deduct $1M of mortgage interest on a primary or secondary home. Moving forward taxpayers can continue to deduct this interest, they can even refinance it into a new mortgage and the interest will remain deductible as long as no additional money is take out and used for any other purpose than to substantially improve the home.

Starting in 2018 taxpayers taking out a new mortgage can only deduct the interest on up to $750k in mortgage interest in total. That could be on first home, vacation home, or both, but the total can’t be over $750k.

What is causing concern for many is the change in the home equity loan interest deduction. In 2017 and prior, one could deduct interest on up to $100k of home equity interest. We will call it a HELOC for short, but in general this is a loan, or line of credit, secured by a residence, which was not necessarily used to purchase, construct, or modify a residence. It could be used for those purposes, but in the past these loans were taken to pay college tuition, buy a car, or to fund a vacation.

However in 2018 this interest deduction is eliminated – for some. Whether or not your home HELOC is considered acquisition indebtedness or home equity indebtedness may ultimately determine whether or not the interest on that loan will continue to be deductible in 2018 and future years under the new tax rules.  Note as mentioned above, this is still up in the air as we need additional guidance form the IRS as to how the language in the tax bill will be applied in the real world.

Today you have some CPAs and tax lawyers stating that all interest from homes equity sources will be disallowed beginning in 2018 and other tax professionals taking the position that home equity loans from acquisition/improvement indebtedness will continue to be eligible for the tax deduction in 2018.  In other words, the latter group of CPAs feel that if the loan proceeds were used to acquire or substantially improve the first or second home then the interest will be deductible, the former group of CPAs not so much.

As always with tax legislation we get deep into the weeds when thinking about the application. For example, how will the IRS police this and determine how the proceeds were used? May seem simple, but for an understaffed IRS this could be another audit nightmare.

So for now, hold off on paying the HELOC off until the final rules come out, and if you did use the proceeds for the purchase of your home or renovations, get the receipts together as they may come in handy if you want to continue to deduct the interest.

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