How the New Tax Law Impacts Mortgage and Home Equity Interest Deductibility

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Under the newly signed Tax Cuts and Jobs Act (the Federal Tax Bill), among the many changes, homeowners will see significant changes concerning the deductibility of mortgage and home equity interest when they file their federal income returns for 2018.

Under the pre-Act rules, interest on up to a total of $1 million of mortgage debt used to construct, acquire or improve a principal residence and a second home could be deducted—for a married taxpayer filing separately, the limit was $500,000. Interest could also be deducted on home equity debt, i.e. other debt secured by the qualifying homes. Qualifying home equity debt was limited to the lesser of $100,000 ($50,000 for a married taxpayer filing separately) or the taxpayer’s equity in the home or homes (the excess of the value of the home over the acquisition debt). The funds obtained via a home equity loan did not have to be used to acquire or improve the homes, and people could use home equity debt to pay for education, travel, health care or other expenses.

Beginning in 2018, the limit on qualifying acquisition debt is reduced to $750,000, or $375,000 for a married taxpayer filing separately. However, for acquisition debt incurred before December 15, 2017, the higher pre-law limit applies. This higher previous limit also applies to debt arising from refinancing acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount.

What does this mean?

A homeowner can refinance up to $1 million of pre-December 15, 2017 acquisition debt in the future and not be subject to the reduced limitation. And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt; this applies regardless of when the home equity debt was incurred.

Accordingly, if people are considering incurring home equity debt in the future, they should take this factor into consideration. And if they currently have outstanding home equity debt, they need to be prepared to lose the interest deduction for it, starting in 2018. (It is still deductible on 2017 tax returns filed in 2018.)

Lastly, both of these changes last for eight years, through 2025. In 2026, the pre-law rules are scheduled to come back into effect. So beginning in 2026, interest on home equity loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million ($500,000 for married separate filers).

This represents a significant change to the mortgage and home equity tax rules to which homeowners have grown accustomed and changes the economics of financing for many taxpayers.

Due to the far reaching effects of the Tax Cuts and Jobs Act, determining the overall impact on any particular individual, business or family will depend on a variety of other complex changes made by this new law. While many planning opportunities are now present – there may be just as many pitfalls without the proper guidance and support. To ensure you are accounting for all scenarios and taking advantage of all potential tax planning strategies, we advise that you work closely with your tax advisor to assess your individual situation.

Our team of experts are continually monitoring developments for further guidance from Congress and the IRS on the above tax reform legislation provisions, and will provide updated information and analysis as necessary.

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Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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