Un­der­stand the new tax rules for home-eq­uity loans

The Palm Beach Post - Residences - - Front Page -

Ques­tion: I have read con­flict­ing sto­ries about how the tax-re­form plan that Pres­i­dent Don­ald Trump signed into law in De­cem­ber af­fects home-eq­uity loans. Can you help?

An­swer: Sure. Un­der the Tax Cuts and Jobs Act that the pres­i­dent signed on Dec. 22, in­ter­est on a new sec­ond mort­gage, home-eq­uity loan or home-eq­uity line of credit can be de­ducted only if the pro­ceeds are used to build, buy or “sub­stan­tially im­prove” the prop­erty that se­cures the loan. In ad­di­tion, to­tal debt on the prop­erty (in­clud­ing any first mort­gage) can­not ex­ceed $750,000 for joint tax-fil­ers and $375,000 for sin­gle-fil­ers. If it does, in­ter­est on the over­age can’t be writ­ten off.

The new rules only ap­ply to loans is­sued on or after Dec. 15, 2017.

Un­der the old law, home­own­ers could bor­row against their built-up eq­uity and use the pro­ceeds any way they wished while still be­ing able to deduct the in­ter­est on the new loan. A com­mon strat­egy was to get a low-rate sec­ond mort­gage or line of credit and then use the money to buy a new car or to pay off higher-rate, nond­e­ductible credit cards or other debt.

That is no longer an op­tion. To­day, in­ter­est on the new loan pro­ceeds can be de­ducted only if the money is poured back into the prop­erty. Any por­tion of the cash that’s used for other pur­poses is not de­ductible.

Talk to an ac­coun­tant or sim­i­lar pro­fes­sional for more de­tails. I’d also usu­ally rec­om­mend one or two free IRS pub­li­ca­tions that ad­dress this topic, but the agency still hasn’t up­dated them to re­flect the re­cent changes in print or on its web­site, irs.gov.

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