During tax season the most common question asked was about the tax reform. How will it affect my 2018 tax return? Which expenses are still allowed? How can I plan to protect my self from owing a lot of money next year? Over the next number of months we will be going through certain changes made to the tax law.
Change #5 – Interest on Home Equity Loans:
OLD LAW:
Under the old law, taxpayers were allowed to deduct the interest on their home equity loans, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled, as long as they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. The dollar limit was $1 million for married filing jointly couples, and $500,000 for married filing separately couple.
NEW LAW:
Under the new law, taxpayers are still allowed to deduct the interest on their home equity loans, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled, as long as they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. The new dollar limit is $750,000 for married filing jointly couples, and $375,000 for married filing separately couple.
The following examples illustrate these points.
Example 1: In January 2018, a taxpayer takes out a $500,000 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 deductible. However, if the taxpayer used 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.
You should seek advice from your tax professional when trying to determine how these changes will affect you.
If you have any further questions or would like talk to us about your tax and/or accounting/bookkeeping situation, call us for free consultation at (240) 676 – 0188 or email us at info@triuneaccountinggroup.com. At Triune Accounting Group it is our business to focus on your business, so you can focus on your business.