Home Interest Deduction Changes
The Tax Cuts and Jobs Act has changed the rules for home interest. Under the old law, taxpayers could deduct interest on home acquisition debt with principal balances up to $1 million. Acquisition debt is indebtedness used to acquire, construct, or substantially improve a qualified residence. Interest paid on the debt balance in excess of $1 million was not deductible as mortgage interest.
In addition, taxpayers could deduct the interest on home equity loans with balances up to $100,000. The loan proceeds did not have to be used to acquire or improve the homes. Taxpayers could use the proceeds to pay for things like a new car, travel, medical expenses, etc. and still deduct the interest expense.
Two major changes have come out of the new law: the limitation on acquisition debt has been decreased and home equity loan interest may not be deductible.
Acquisition Debt
First, the limit on acquisition debt has been decreased to $750,000. This new rule is effective for loans arising after December 15, 2017. Older mortgages are grandfathered in for the $1 million threshold.
Home Equity Loans
The second change revolves around home equity loans. In general, home equity loan interest is disallowed, regardless of the date of the loan. However, you may still be able to deduct the interest depending on how you originally used the proceeds from the loan. The tax code does not specify the types of loan that qualify for certain interest deductions. Rather, the deductibility is determined by the usage of the loan proceeds. Therefore, if a home equity loan otherwise qualifies as acquisition debt, then the interest should continue to be deductible as mortgage interest. Further, if the loan was used to acquire a business or for other investment purposes, the interest may still be deductible elsewhere on the tax return.
For home equity loans that were not used for the items mentioned above, the interest would no longer be deductible. Taxpayers will not be able to refinance their home equity loans into their primary mortgage to get around this treatment because refinancing would not change the fact that the original loan was not acquisition debt.
The IRS may issue guidance on the deductibility of home equity interest where the loan was used for the items described above. We will monitor this area and update as necessary.
If you would like to discuss any of these items or would like additional information please give us a call.
Sean Hauenstein, CPA
Copeland Buhl & Company PLLP
(952) 476-7100