Mountain Mortgage Guy: Tax law changes impact home equity borrowing (column)
March 28, 2018
There has been considerable confusion lately over deducting interest on mortgage loans, and the IRS recently issued some new guidelines to clarify the matter. While nothing about tax law is easy, here are some of the highlights.
The tax law changes limit interest on loans taken out to purchase or substantially improve your current or new home to the interest paid on up to $750,000 for married owners who file jointly. Single individuals or those couples filing individually are limited to $375,000.
That lower limit is going to hit more than a few single individuals around here, due to the high price of homes. Previously, the limit was $1,000,000 and $500,000 for single filers.
In addition, if you take out a home-equity loan, then you can only deduct the proceeds of the amount used to purchase or substantially improve your home. In the past, all the interest was deductible up to the max loan limits.
This means if you have a first mortgage loan of $600,000 and take out a home equity loan for $150,000 and use the proceeds of that loan to remodel and improve your home, then all of the interest should be deductible.
However, if you only spend $75,000 of the home equity loan on the remodel and use the other $75,000 to pay off credit cards, then you can only deduct half of the interest on the home equity portion.
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Another interesting aspect is if you were considering using the proceeds of a home equity loan on your primary residence to purchase a vacation home. Under the new law you would not be able to deduct the interest on the funds taken to purchase the new vacation home.
Mortgage interest on an investment property is still tax deductible with no limits. So if you plan to rent out your new vacation home, then it might be best to put as much debt on that property as possible and you should be able to deduct that interest.
However, the double edge of that sword is that if you identify to your lender your intent is to purchase the new property as an investment property, then you will be subject to stricter underwriting rules, generally a higher interest rate and need a larger down payment than if you are purchasing a second home. But for some, the ability to fully deduct the mortgage expense might make it worth it. Doing so would also free up the amount of mortgage interest you can deduct on your primary home to the maximum, $750,000.
Meticulous record keeping is now more important than ever if you plan to spend part of your home equity loan proceeds on what is deductible and part that is not.
From everything I am hearing, if you have a mortgage that was taken out prior to Dec. 31, 2017, that is between the $750,000 and $1,000,000 cap, then you should still be able to deduct all of that interest. But as every taxpayer's situation differs, consult your tax advisor on your particular situation. I am not a certified public accountant here, and there may be additional factors that influence your particular situation. In addition, the IRS interpretation and tax court decisions may impact these rules over the next few years.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.