Quick Glance:
- Interest on HELOCs (Home Equity Lines of Credit) is not deductible anymore unless used to improve the home
- With new mortgages, interest is deductible only on first $750K of home value (couple, $350k separate filing), as aggregate value if multiple properties owned
- State and local property tax deduction is capped at $10K
Tax Code Changes in 2018
As with any year, as we head into the final months of 2018 Holdfast Wealth Management has received an increasing number of questions about changes to the tax code, more specifically around mortgages, home equity loan deductions, and property tax deductions. That’s why this time around we’re going to take a look at changes to the tax code governing home equity loans and home equity lines of credit (HELOCs) deductions, to help you avoid confusion and maximum your deductions.
While there have indeed been changes to the tax code, it’s worth noting that according to the IRS, “in many cases they [borrowers] can continue to deduct interest paid on home equity loans,” with a few new stipulations. But first, a quick refresher on home equity loans and HELOCs:
Home Equity Loans & HELOCs
Home equity loans and lines of credit are essentially additional mortgages that you can take out on your home. These loans use the equity in your home as collateral for the lender, and have some key advantages over unsecured borrowing such as credit cards.
Because home equity loans are secured against the value of your home, they tend to come with extremely competitive interest rates, often times nearly as low as the rate on a first mortgage.
HELOCs, are similar in function but work differently, in that they are they come with a revolving line of credit that can be negotiated and drawn upon as expenses and needs change, whereas home equity loans pay out one fixed and predetermined amount. Another key difference is that most home equity loans have a fixed interest rate while home equity loans typically have a floating rate (usually the Prime Rate plus a fixed amount).
With either type of loan, lower interest rates makes taking the mortgage against your house an appealing option when looking to pay down credit card or other personal debt. However, while home equity loans and HELOCs can be good tools when applied appropriately, they also have limitations, and recent changes to the tax law means that there are fewer deductions that you can take advantage of than in years past.
2018 Mortgage and HELOCs Changes
Prior to 2018, tax payers were allowed to deduct interest not only for acquisition debt (mortgages used to “buy, build, or substantially improve” the home), but also interest on up to $100,000 of home equity loans/HELOCs that were used for purposes and personal expenses not related to the home itself. Thus, you could deduct such interest when used to pay down credit card debt or make a large payment or purchase. In other words, the money was yours, and you could pay down other types of debt or spend on other expenses and still deduct the interest (on the first $100,000 of the loan/line).
This year, however, this is no longer the case. As of now, that is no longer an option, from 2018 extending until 2025. However, it’s important to note here that you can still can use home equity loan money on other expenses; you simply can’t deduct the interest on those expenses.
Deductions on Home Improvements
While in 2018 you no longer are able to deduct these loans when used for personal expenses, you still are able to deduct interest on home renovations or additions that add to the overall value of the house. For tax year 2018, you can deduct interest on up to $750k of home equity loans, if the loans are used for an acquisition or home improvement project, so long as you itemize the deductions.
Couples are able to deduct interest on up $750,000 of eligible debt (or up to $375,000 if filing separately). This is a change from previous years, where the cap was at $1 million.
What this means for you, is that while changes have been made that limit the deductions you can take from interest on home equity loans, there are still great advantages and avenues to meaningfully increase the value of your home while getting to write off a large portion of the interest.
State and Local Property Tax Deduction
Lastly, under the new tax plan, taxpayers who itemize will only be able to deduct their individual state income, sales and property taxes (SALT) up to a limit of $10,000 in total for the 2018 year, a change from the past deduction, which was previously unlimited.
What this means is that the law limits the amount of SALT that you can deduct, and potentially means you cannot take as much advantage of past deductions. For example, if your real estate property taxes were $10,000 and your state income taxes were $5,000, you will be limited to a total deduction of $10,000 instead of deducting the total $15,000 as in the past. You also might not itemize at all under this new regime, especially given the increased standard deduction.
These are just a few of the questions you might have about changes to the tax code. For expert guidance and answer to all your end-of-year questions, contact Holdfast Wealth Management today.
