This article can be found in The Argonaut, where Lisa Phillips is a regular contributor.
Q: As a homeowner, I’m still unclear whether I’m going to be permitted to deduct the interest from my home equity loan on my tax returns? If I already have one, is it grandfathered in?
A: The new tax reform rules have caused much confusion, even amongst tax professionals- and I am NOT a tax professional, but as a Realtor®, I do my best to stay informed and get the latest relevant information for my homeowner or buyer clients. The statute itself created the confusion regarding ability to deduct interest from home equity lines. Section 11043(a) of the Tax Laws and Jobs Act amends Section 163(h)(3) of the Internal Revenue Code by 1) disallowing home equity indebtedness interest, and 2) limiting deductibility of home acquisition indebtedness to $750,000 (this was previously $1,000,000). Within the statute, acquisition loans, meaning loans obtained to pay for the purchase price of your home, obtained prior to December 31, 2017 (or in escrow for a period around that time) were “grandfathered” in, meaning you would not be subject to the new, reduced, $750,000 limitation.
However, there was no such “grandfather” provision as related to home equity loans. Similarly, while the new law protects even the refinanced acquisition loans that it has grandfathered in, it expressly excluded the refinancing of home equity lines from the same protection. This left everyone wondering- are all home equity line interest payments now unavailable for any tax deductions? Well, the IRS recently issued a clarifying ruling (IR-2018-32), stating that regardless of how the loan is labeled, including home equity loans or lines of credit, if it represents acquisition cost of your qualified residence or was used for the improvement of that residence, interest is deductible, although total interest deductions taken are still capped at the $750,000 principal limit. If you used your home equity line to pay down credit card debt or take a vacation, you may not deduct the interest, but if you used it toward improving the home itself, you can, as long as it doesn’t take you over the new limits. Remember- always consult a tax professional for information and applicability to your own circumstances. Meanwhile, here are the specific examples provided by the IRS for illustration:
“Example 1: In January 2018, a taxpayer takes out a $450,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductibele. However, if the taxpayer use the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible (see Publication 936).”
I hope that helps. There are still many questions to be answered, and I will do my best to keep you informed as the IRS provides guidance. The best person to advise you is your licensed tax professional- this is new and complicated so don’t skimp on hiring professionals for this!
Disclaimer: This article is intended to be primarily for entertainment purposes, and is not to be considered legal advice.
ABOUT LISA PHILLIPS, ESQ / CA Bureau of Real Estate Lic# 01189413
Lisa Phillips is an active Realtor in the Los Angeles area, with more than twenty years as a practicing real estate broker and attorney. Her unparalleled knowledge of real estate, from local markets and pricing to legal issues and deal-making, has made her a trusted and valuable asset to her clients. In addition to her real estate and business savvy, Lisa is passionate about helping others, and works tirelessly to achieve the best results for her clients. For more information, please visit www.LisaPhillipsRealEstate.com
