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Also, you can refinance that existing mortgage and keep deducting the interest on up to $1 million of debt, so long as you don’t increase the amount you owe with the refi. The sweeping tax bill signed into law just before the 2017 holidays brings changes for virtually all homeowners -- but, for the most part, not until you file your 2018 tax return in 2019. All of this is subject to the new $750,000 debt limit on the total amount of all loans.
Rebecca Lake is a journalist with 10+ years of experience reporting on personal finance. This copyrighted material may not be republished without express permission. The information presented here is for general educational purposes only.
Some Home Equity Loans Still Deductible
The Tax Cuts and Jobs Act of 2017 introduced a slew of new tax breaks while doing away with several others. Some of the tax changes directly affected taxpayers who own a home or plan to purchase one. Under the old rule, taxpayers could claim a child tax credit of $1,000 per child under the age of 17. It then decreased by $50 for every $1,000 a taxpayer earns over specific thresholds.
Similarly, there's no deduction for re-fi interest you were planning on using to pay for college, take a vacation, or finally master the sport of curling. PE firms typically use “leverage,” or borrowing, to finance their purchases. They use the assets of the target companies as collateral, just like a prospective homeowner uses the value of the purchased home as collateral for a mortgage.
The Standard Deduction Is Going Up
In response, the IRS recently issued a statement clarifying that the interest on home equity loans, home equity lines of credit and second mortgages will, in many cases, remain deductible. Instead, it is classified as home equity debt; so, you can’t treat the interest on that loan as deductible qualified residence interest for 2018 through 2025. The Tax Cuts and Jobs Act changes the rules for deducting interest on home loans. Most homeowners will be unaffected because favorable grandfather provisions will keep the prior-law rules for home acquisition debt in place for them.
Justin Pritchard, CFP, is a fee-only advisor and an expert on personal finance. He covers banking, loans, investing, mortgages, and more for The Balance. He has an MBA from the University of Colorado, and has worked for credit unions and large financial firms, in addition to writing about personal finance for more than two decades.
Standard Deductions
It might even provide some tax benefits since the interest you pay is sometimes deductible. But if you use the money to pay off credit card debt or student loans — or take a vacation — the interest is no longer deductible. But the Internal Revenue Service, saying it was responding to “many questions received from taxpayers and tax professionals,” recently issued an advisory. According to the advisory, the new tax law suspends the deduction for home equity interest from 2018 to 2026 — unless the loan is used to “buy, build or substantially improve” the home that secures the loan. Under prior tax law, a taxpayer could deduct “qualified residence interest” on a loan of up to $1 million secured by a qualified residence, plus interest on a home equity loan up to $100,000.
However, many homeowners will be adversely affected by the TCJA provision that generally disallows interest deductions for home equity loans for 2018 through 2025. This article explains what you need to know to avoid unpleasant surprises when you file your taxes for 2018. Taking the standard deduction would likely give them a bigger tax break than by itemizing. Again, you must choose one or the other — itemizing or the standard deduction — and can’t take both. A way to deduct more than $10,000 — or $5,000 if you’re married filing separately — is if your home is used partially for business or partially rented out.
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The interest on home equity loans cannot be deducted for tax purposes if the proceeds were not used to buy, build or substantially improve your home. You can deduct interest on a home equity line of credit , but only if you use the funds for home improvements. The introduction of the Tax Cuts and Jobs Act eliminated deductions on interest if you use the funds for anything else, such as to consolidate debt.
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And unlike the deduction for interest on primary mortgages, home equity deductions are disappearing for both new and existing borrowers. In the past, if a taxpayer’s job required certain purchases in order for an employee to perform their job and the employer was unable or unwilling to reimburse the employee, those expenses were tax deductible. For example, employees could deduct mileage driven for work purposes , uniforms, tools, union dues and more as long as they met the 2 percent rule for miscellaneous deductions. BTW, talk with your tax preparer if you prepaid your 2018 property taxes in 2017 in hopes of maxing out your deductions before the tax law change. The rules apply to the return you will file next year, for 2018, said Cari Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants. Interest on home equity loans or lines of credit you paid in 2017 is generally deductible on the return you file this year, regardless of how you used the loan.
However, you must have lived in the home for at least two of the last five years prior to its sale. For example, if you bought a home a few years back for $300,000 and sold it today for $900,000, youd make a $600,000 profit. So if youre married and filing jointly, as little as $100,000 of your gain could be subject to tax.
Thank you to Aubrey Hone, D. Chris Kollaja, and Kevin Tusing for this overview of the new law and the types of changes that may affect your household’s financial standing. In December 2017, the Tax Cut and Job Acts was passed and signed into law. The controversial bill erases many long-time deductions and may affect your own tax preparation going forward. This extends beyond our grantmaking to provide information to the financial backers of our work, knowing that strong organizations require strong donors.
TaxesFor most tax deductions, you need to keep receipts and documents for at least 3 years. The rules no longer allow you to use home equity loans to get tax-deductible financing for such things as consumer debt and tuition. You just can’t take the interest deduction on the amount used for those purposes, Ms. Weston said. That is because any acquired goodwill and other intangible assets may be written off over 15 years, even if these assets do not lose value.
Tax Deductions For Home Mortgage Interest Under TCJA
Homeowners who bought before then can still deduct the interest on mortgage debt of up to $1 million. The IRS this week clarified a provision of the Tax Cuts and Job Acts that eliminates the deduction for interest paid on home equity loans and lines of credit. You do not need to report loan proceeds as income, and you cannot deduct interest payments on those loans. However, the IRS makes an exception for personal loans that are secured by a residence, as is the case with mortgages, home equity loans, and HELOCs. You can deduct the interest on up to $750,000 in home loan debts if the loans were made after Dec. 15, 2017. If your total mortgage debt is higher than that, then you wont be able to deduct all of the combined interest paid.
While the new Tax Cuts and Jobs Act adversely shifts the playing field for home mortgage interest deductions, all is not necessarily lost. Many homeowners will be blissfully unaffected because “grandfather” provisions keep the prior-law rules in place for them. Mortgage interest rates are high right now, so refinancing may not be your best option if your mortgage has a significantly lower interest rate than is currently available. In this case, it may be better to use a home equity loan even if the interest is not tax deductible. Homeowners must continue to meet the requirements of the previous law, which stated the loan must be secured by the taxpayer’s main or second residence, and the funds cannot surpass the cost of the home.
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