The “Tax Cuts and Jobs Act of 2017” which passed in December of that year, made sweeping changes to United States tax law. No similar tax law impact was felt since the Tax Reform Act of 1986. As many of you will remember, it was one of the two large tax reform bills passed during the Reagan administration. In the Tax Cuts and Jobs Act of 2017, (TCJA 2017) many aspects of the average American taxpayer’s life was affected. While we won’t go into all of them today, we will examine the impact upon certain financial instruments like the home equity line of credit and the home equity loan. Who doesn’t love the smell of intricate tax law reform in the morning, right?
The TCJA 2017 Important Bullet Points For Homeowners
- Mortgage interest deduction for newly purchased homes lowered from $1,000,000 to $750,000. A 25% decrease.
- Changes to the home equity loan interest tax deduction
- SALT (State and Local Income Tax) deduction capped at $10,000 annually
- Cap of $350,000 on qualified residence loans for a married taxpayer filing a separate return
- The limits apply to the combined amount of loans used to buy, build, or substantially improve the taxpayer’s main home and second home (IRS.gov statement)
Home Equity Lines of Credit, Home Equity Loan, And Second Mortgage Tax Deduction Changes
According to the Internal Revenue Service in a statement released in February this year, there are definitely some big changes to the way that the tax deductible nature of HELOC and other home equity based financial products’ interest, but it isn’t as bad as many headlines may make it seem. In their statement, the IRS said that a home equity loan’s interest paid is NOT tax deductible UNLESS it is “used to buy, build or substantially improve the taxpayer’s home that secures the loan.” So, you can still take out home equity lines of credit and still use them to do things like pay down student loans or pay off credit cards, but the interest on those loans is no longer tax deductible.
Another important stipulation with TCJA 2017 is that in order for the loan interest to be tax deductible, it must be used on the home that secured the loan. So, for example, if you have a main home in Denver and a vacation home in Vail and you take a home equity line of credit out for $250,000 on your Denver house you can’t use it to renovate and upgrade your house in Vail and deduct it on your taxes. Even though you used the money exclusively to improve and upgrade one of your houses, just like the IRS said, you interest on that loan will NOT be tax deductible since it was used to improve a different home. The interest will be deductible if you took that $250K and put it towards a new roof or other improvements to your main residence in Denver.
Whether you own a house in Boulder or Westminster, taking out a home equity loan is going to be different for the foreseeable future. However, if used with some careful planning, you can still reap the benefits from one. These new regulations are set to phase out in 2026.