Tax Law and Home Ownership
Feb. 15, 2018 Article

The New Tax Law and Home Ownership

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Generally, the mortgage-interest deduction is broken down into two deductions, both of which have different limits to consider; they are acquisition indebtedness and home equity indebtedness.

  • Acquisition indebtedness is debt incurred in acquiring, constructing or substantially improving a qualified residence. The maximum amount treated as acquisition indebtedness was $1 million ($500,000 for married taxpayers filing separately) prior to the Tax Cuts and Job Act (TCJA). A mortgage balance in excess of the limit is generally not deductible.
  • Home equity indebtedness is any debt other than acquisition indebtedness that is secured by the taxpayer’s residence. The maximum loan balance deductible for home equity indebtedness is $100,000 ($50,000 for married taxpayers filing separately). Prior to TCJA, home equity loan proceeds could be spent much more liberally and still be deductible. They could be spent on more than just acquiring, constructing, or substantially improving a qualified residence; they could even be spent on personal expenses.

The new tax act completely overhauls how this deduction is treated for tax years 2018 through 2025.

During 2018 through 2025, the new law reduces the acquisition indebtedness limitation from $1 million to $750,000 ($375,000 for married taxpayers filing separately). In addition, it also completely suspends the home equity indebtedness deduction ($100,000/$50,000) entirely for the next eight years. However, if a home equity loan is used to substantially improve a qualified residence or acquire a second home, it may still be deductible.

Acquisition indebtedness that was incurred before Dec. 15, 2017 will be grandfathered under the older increased limitation of $1 million ($500,000). However, there is no grandfathered exception for the home equity loans. Home equity loans will only be deductible during 2018 – 2025 if the proceeds are used to acquire or substantially improve a residence. Home equity loans used for other purposes will not be deductible.

A taxpayer who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before April 1, 2018, shall be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, and indebtedness will be grandfathered under the older $1 million limit.

The new law also changes the limit on the amount of real property taxes you can deduct during 2018 - 2025. Under TCJA, the deduction for taxes is now capped at $10,000. This $10,000 limit includes your real property taxes paid, as well as your state income taxes.

Your wealth advisor can discuss these limitations further and how they apply to your specific tax situation.

 

The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. There is no guarantee that any claims made will come to pass.

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