The new tax bill, the Tax Cuts and Jobs Act (“TCJA”) shepherded in by President Trump and members of the Republican Party will bring many changes to the mortgage industry.
The main changes reside with the mortgage interest deduction, home equity loans, home equity lines of credit, and second mortgages.
Due to concerns and questions from taxpayers the IRS released an advisory titled “Interest on Home Equity Loans Often Still Deductible Under New Law,” to address how home equity loans and second mortgages will be treated under the TCJA.
Many homeowners were worried that under the TCJA the deduction of interest from home equity loans, and lines of credit would cease to exist. The advisory states that under the new tax law deductions are suspended for home equity interest from 2018-2026 unless the loan is used to “buy, build or substantially improve” the home that secured the loan.
The IRS states as an example – “interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.”
The advisory issued by the IRS also address the new dollar limit on total qualified residence loan balance. Under the TCJA there is a lower dollar limit on mortgages qualifying for the home mortgage interest deduction.
|TCJA (Tax Year 2018)||Current Tax Law (Tax Year 2017)|
|Qualified Residence Loans qualifying for home mortgage interest deduction||$750,000 ($375,000 for a married taxpayer filing a separate return)||$1 Million ($500,000 for a married taxpayer filing a separate return)|
In the advisory issued by the IRS they list multiple examples on the change to qualified residence loans, which you can find here.
As the deduction of interest on home equity loans becomes more scrutinized, it is important to make sure you are accurately documenting how the money you borrowed was used. To do this make sure you are keeping records and receipts for everything you are purchasing with the money you borrowed.
Note: these rules do not apply for the current 2017 tax year and will go into effect for the 2018 tax year.
For further questions on how the Tax Cuts and Jobs Act may impact you visit our Tax Cuts and Jobs Act Resource Center to contact one of our experts!