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Entries in Equity Loan (1)

Thursday
May032018

2017 Tax Cut and Jobs Act Non-deductible Home Mortgage Interest

The Tax Cut and Jobs Act of 2017 is not wholly a tax cut or a jobs act. There are lower dollar limits on mortgages qualifying for home mortgage interest deduction. Starting in 2018 the limit is set at $750,000, down from $1 Million. This limit applies to the total of all debt secured by the home, many taxpayers will have the original acquisition mortgage and a home equity mortgage. If the total of the mortgages is greater than $750,000 a portion of the interest will be non-deductible. There is no word yet if existing loans that exceed the lower limit of $750,000 are grandfathered.  Or if the formula used under prior law to calculate the non -deductible interest for loans exceeding the limit will be applied. My guess is the formula will be applied without grandfathering in the loans that exceed the lower limit.

A second provision in the same area with large implications suspends the deduction of interest paid on non-acquisition mortgages for tax years 2018 to 2026 where the loan proceeds were not used to improve, expand, or add to the value of the home securing the loan. The same restrictions of the prior law still apply. The loan must not exceed the cost of the taxpayer’s main home or second home (a qualified residence), be secured by the home, were taken out before or after certain dates.

A client called asking about how the suspension of deductible interest would affect his small business by limiting his primary source of financing, his home. For many taxpayers their home is the only source of financing to start or expand a business. Other sources of financing; primarily retirement savings, either through loans from or withdrawals have limits on the amount barrowed and must be repaid within 5 years. Or penalties for early withdrawal and the tax on the deferred compensation is due in the year of the withdrawal reducing the funds available for business purposes or necessitating a larger withdrawal, penalty, and tax to have enough funds to finance the business.

In my opinion if the non-acquisition mortgage is for a legitimate business purposes the home owner/business owner will be able deduct the interest paid as a business expense. I have not yet read where this change limits the use of home equity for business purposes. Some IRS officials may interpret or expand the scope of the home improvement requirement to exclude business purposes with subsequent tax court cases determining if it does limit the deductibility of business use interest.

So, why did that pack of rascals called Congress make non-acquisition mortgage interest non-deductible when the proceeds of the loan do not improve the home or; in my opinion, serve a business purpose? Many taxpayers; and lenders are pushing this, use home equity loans to payoff personal debt, mainly credit card debt. Usually without the taxpayer changing their spending habits with the result the taxpayer is deeper in debt. Many of these mortgages have variable interest rates, banks can and have lowered HELOC barrowing limits overnight on a whim; basically it is an area where abuse exists.

Congress remembers the 2007-2008 meltdown and subsequent financial uncertainties, the pain of economic loss, and fear of financial collapse. Congress seeing the ticking time bomb of non-acquisition mortgage debt took a step to head off a repeat of the 2007-2008 financial crises. Too many taxpayers enjoying the hope of increased earnings are living beyond their means and using home equity to pay for it. Congress set the table for the 2007-2008’s woes, this time Congress is showing unusual wisdom.

 

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The Tax Cut and Jobs Act of 2017 is not wholly a tax cut or a jobs act. There are lower dollar limits on mortgages qualifying for home mortgage interest deduction. Starting in 2018 the limit is set at $750,000, down from $1 Million. This limit applies to the total of all debt secured by the home, many taxpayers will have the original acquisition mortgage and a home equity mortgage. If the total of the mortgages is greater than $750,000 a portion of the interest will be non-deductible. There is no word yet if existing loans that exceed the lower limit of $750,000 are grandfathered.  Or if the formula used under prior law to calculate the non -deductible interest for loans exceeding the limit will be applied. My guess is the formula will be applied without grandfathering in the loans that exceed the lower limit.

A second provision in the same area with large implications suspends the deduction of interest paid on non-acquisition mortgages for tax years 2018 to 2026 where the loan proceeds were not used to improve, expand, or add to the value of the home securing the loan. The same restrictions of the prior law still apply. The loan must not exceed the cost of the taxpayer’s main home or second home (a qualified residence), be secured by the home, were taken out before or after certain dates.

A client called asking about how the suspension of deductible interest would affect his small business by limiting his primary source of financing, his home. For many taxpayers their home is the only source of financing to start or expand a business. Other sources of financing; primarily retirement savings, either through loans from or withdrawals have limits on the amount barrowed and must be repaid within 5 years. Or penalties for early withdrawal and the tax on the deferred compensation is due in the year of the withdrawal reducing the funds available for business purposes or necessitating a larger withdrawal, penalty, and tax to have enough funds to finance the business.

In my opinion if the non-acquisition mortgage is for a legitimate business purposes the home owner/business owner will be able deduct the interest paid as a business expense. I have not yet read where this change limits the use of home equity for business purposes. Some IRS officials may interpret or expand the scope of the home improvement requirement to exclude business purposes with subsequent tax court cases determining if it does limit the deductibility of business use interest.

So, why did that pack of rascals called Congress make non-acquisition mortgage interest non-deductible when the proceeds of the loan do not improve the home or; in my opinion, serve a business purpose? Many taxpayers; and lenders are pushing this, use home equity loans to payoff personal debt, mainly credit card debt. Usually without the taxpayer changing their spending habits with the result the taxpayer is deeper in debt. Many of these mortgages have variable interest rates, banks can and have lowered HELOC barrowing limits overnight on a whim; basically it is an area where abuse exists.

Congress remembers the 2007-2008 meltdown and subsequent financial uncertainties, the pain of economic loss, and fear of financial collapse. Congress seeing the ticking time bomb of non-acquisition mortgage debt took a step to head off a repeat of the 2007-2008 financial crises. Too many taxpayers enjoying the hope of increased earnings are living beyond their means and using home equity to pay for it. Congress set the table for the 2007-2008’s woes, this time Congress is showing unusual wisdom.