Almost 33 million Americans claimed home loan-related deductions in 2016, but fewer homeowners may be able to reap such benefits in 2018 due to tax reform changes.
The final version of the Tax Cuts and Jobs Act reduced the cap on acquisition indebtedness for the mortgage interest deduction and potentially eliminated the home equity loan interest deduction. Homeowners currently filing their 2017 tax returns may still claim these deductions at the previous levels.
Due to the high volume of feedback received from taxpayers and the real estate and financial services industries, the IRS recently issued a bulletin to clarify that the home equity loan interest deduction may still be an option and reiterate the new levels of mortgage interest deductibility.
Mortgage interest deduction capped
Tax reform reduced the dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct mortgage interest on $750,000 of qualified residence loans. The limit is $375,000 for married filing separately taxpayers. The previous cap of $1 million remains for older debt for married filing joint taxpayers and $500,000 for married filing separately taxpayers. The mortgage interest deduction applies to both primary and vacation homes.
These new thresholds are effective for mortgage debt incurred after December 15, 2017.
Home equity loan interest may still be deductible
The initial takeaway from the Tax Cuts and Jobs Act was that the deduction for home equity loan interest was fully suspended starting in 2018. The IRS stated on February 21, 2018, that this was not a complete removal of the deduction. Instead, taxpayers may continue to deduct interest on their home equity loan, home equity line of credit (HELOC) and lines of credit provided the loan meets certain usage criteria.
Interest on home equity loans with borrowings no more than $100,000 may be deductible as long as the loan proceeds are used to “buy, build or substantially improve” the home that secures the loan. Any other use is not permitted for the deduction.
For example, interest on a home equity loan is deductible if the loan’s purpose is to build an addition on the taxpayer’s primary or secondary residence, but it is not deductible if used to pay down credit card debt. Additionally, if a homeowner takes out a home equity loan on a primary residence to purchase a vacation home, this interest will not be deductible. In this case, the homeowner would need to take out a second mortgage to purchase the vacation home.
As federal regulators interpret the statutory tax reform language into practice, more guidance and clarification will follow. RKL is monitoring these developments and will continue to provide updates as needed.
In the meantime, taxpayers with questions about their eligibility for certain itemized deductions should contact their RKL advisor.
Be sure to visit our Tax Reform Resource Center for more insights and information.
Contributed by Ruthann J. Woll, CPA, Principal in RKL’s Tax Services Group and member of the firm’s Not-for-Profit Industry Group. Ruthann oversees the firm’s individual and non-profit tax planning and compliance, and has significant experience delivering tax services to organizations, institutions and individual clients.