Home equity deductions change

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Q. Will I lose the home equity interest deduction in 2018? What if I refinance my current mortgage of $200,000, and take $250,000 and use the extra money to consolidate a loan, pay for college, buy a boat, etc. Will the entire interest be deductible?
— Homeowner

A. You’re correct that the rules for home loan deductibility have changed for 2018.

Here’s what you need to know.

Under the rules before the new tax plan, you could deduct interest on up to a total of $1 million of mortgage debt used to acquire or improve your principal residence and a second home, said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.

This is known as “acquisition debt.”

Gallo said for a married taxpayer filing separately, the limit was $500,000.

You could also deduct interest on home equity debt — other debt secured by the qualifying homes — and the home equity debt was limited to a maximum amount of $100,000 or $50,000 for a married taxpayer filing separately.

“The funds obtained via a home equity loan did not have to be used to acquire or improve the homes,” he said. “So you could use home equity debt to pay for education, travel, health care, etc.”

Under the new tax plan, starting in 2018, the limit on qualifying acquisition debt is reduced to $750,000, or $375,000 for a married taxpayer filing separately.

“However, for acquisition debt incurred before Dec. 15, 2017, the higher pre-Act limit applies,” Gallo said. “The higher pre-Act limit also applies to debt arising from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount.”

This means you can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt in the future and not be subject to the reduced limitation, he said.

Importantly, starting in 2018, there is no longer a deduction for interest on home equity debt. This applies regardless of when the home equity debt was incurred, Gallo said.

So if you’re considering incurring home equity debt in the future, you should take this factor into consideration, he said. And if you currently have outstanding home equity debt, be prepared to lose the interest deduction for it, starting in 2018. You will still be able to deduct it on your 2017 tax return, filed in 2018, he said.

Lastly, both of these changes last for eight years, through 2025. In 2026, the old rules are scheduled to come back into effect, he said, so beginning in 2026, interest on home equity loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million or $500,000 for married separate filers.

“To answer the homeowner’s question, interest expense on the extra $50,000 of mortgage debt that is not use to improve the residence, i.e. consolidate a loan,  pay for college or buy a boat is no longer deductible starting 2018 thru 2025,” Gallo said.
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