Mortgage interest rules

I'm doing a general CPE on the new tax law changes. The point I'm at deals with mortgage interest. My understanding from other data I've read is that interest on HELOC's and lines of credit are no longer deductible, whether new in 2018 or existing.

My material says "Interest paid on home equity indebtedness - home equity loans and lines of credit, in other words - incurred after December 15, 2017 is not tax deductible unless used to buy, build or substantially improve the taxpayers home that secures the loan. (bold letters are part of the original. So I did a Google search and I'm getting conflicting information that includes the deductibility of such interest as stated and even if the funds are used to purchase a second home (example was a vacation home), and specifically excluding deducting interest on funds used to pay for such things as education, cars, paying off credit cards etc. The caveat being that loan has to be tied to the taxpayers home. If that's the case, then there's not really a whole lot of difference from before the TCJA with the exception of the overall $750,000 limitation. Some of those articles were written in the early part of the year just after the enactment of the TCJA, so possibly things have clarified better since then.

Am I misunderstanding this? Or is my material incorrect?

What a bank calls a loan and what the tax code considers a loan are different things.

Under the tax code there is equity debt and acquisition debt - equity debt is debt used for any purpose secured by your home. The first $100k of interest on this debt had been deductible, but is no longer.

Acquisition debt is money that is secured by a qualified residence and used to buy, build or improve such property. Interest on that is still deductible, however the cap has been lowered to $750k for new loans.

I understand that, but my CPE is clearly saying Home Equity loans and Lines of credit, that are secured by the taxpayer's home can still be deductible subject to the overall $750,000 limitation. When clients come to our offices, they are bringing us documents that say HELOC or Home Equity Loan on them, and local banks are still promoting HELOCs. This is going to create confusion and probably some animosity with clients. What you are saying TaxMonkey is that these products wouldn't be deductible because they are not acquisition debt, which is what I understood it to be. But it looks like there is a caveat to be considered.

I don't understand what your post added. What caveat is to be considered? Interest on loans that is not acquisition debt is not deductible. It doesn't matter what the bank calls the loan, and it never has.

The first $100k of interest on this debt had been deductible. Don't think so.

The first $100k of interest on this debt had been deductible. Don't think so.

LOL, interest on the FMV less total indebtedness up to $100k used to be deductible.

FMV? Of what?

". . Interest on loans that is not acquisition debt is not deductible" HELOC's or Equity LOC's are not acquisition debt. The caveat is " unless used to buy, build or substantially improve the taxpayers home that secures the loan." If those parameters are met, and the debt doesn't exceed $750,00 total, then it seems that the interest is deductible. When discussions started on this topic, it was about interest on HELOCs and Equity LOCs not being deductible at all.

Prior to the 2018 changes, most people could use a Home Equity loan up to $100,000 to buy a car, go on vacation etc. And the interest was a Sch A deduction. Welcome to 2018. I presume HE loans prior to 2018 were grandfathered but not sure of that. I have not looked to see if the interest on a $150,000 loan used to remodel a [property qualifies as a Sch A deduction. I assumeit would be.

I'm beginning to think that if we are to allow interest from a HELOC or Equity LOC as a deduction on the Schedule, we will need to be sure that the combined mortgage amount does not exceed $750,000 and that the funds have been used to "buy, build or substantially improve". I know some people whose word I would be very unsure of. It makes me very uncomfortable.

we will need to be sure that the combined mortgage amount does not exceed $750,000 and that the funds have been used to "buy, build or substantially improve"

You needed the same info under the $1,000,000 + $100,000 rule.

My material says "Interest paid on home equity indebtedness - home equity loans and lines of credit, in other words - No, that is completely wrong, your CE material is for shite. Home equity indebtedness is NOT "in other words" HELs and HELOCs. And a first mortgage can be entire equity debt, too.

This illustrates what is so scary about this -- not the new tax law, but long-time preparers who never correctly understood the old law. Because of AMT, you always had to determine mortgage interest on acquisition debt vs. equity debt, and has been stated repeatedly, what the bank calls it is irrelevant.

All the new tax law did was move some of the basic AMT rules into the regular tax system, such as mortgage interest, along with no personal exemptions, high standard deduction, etc. If you didn't understand AMT, then yes this might all seem new.

All the new tax law did was move some of the basic AMT rules into the regular tax system, such as mortgage interest, along with no personal exemptions, high standard deduction, etc. If you didn't understand AMT, then yes this might all seem new.

Makbo, I'm going to agree with you here, but turn the tone a little differently. With all the press about big changes in the tax law, this gives preparers the opportunity to press 'reset' on some of these dynamics they may not have been perfectly attuned to in the past.
It's a rather easy conversation. "Many changes occurred in tax law for 2018. In reviewing your file, here are some things that WE need to change." In some cases, maybe that change isn't necessarily in the new tax law. Either way, take the opportunity to remove risk that may exist through the "same as last year" approach.

turn the tone a little differently.

I was thinking as I wrote my post about trying not to make it seem like a direct criticism of the OP. It's really the producer of the CE material who ought to be ashamed. It's one thing for a tax preparer to learn or re-learn something, but when the self-proclaimed experts are messing it up so badly, that is a serious problem. And this is hardly the first time I've heard or read similar tales.

Because of items like this one (interest on equity mortgages), and QBI for landlords, and paying bogus wages to kids, I fear the tax "cut" is going to be far larger than even the liars in Washington DC claim it to be. And yet, many taxpayers will actually have an unexpectedly small refund, or balance due, thanks to inaccurate withholding. It's a cliche I hardly ever use, but for sure THIS upcoming tax season will be a fun one!

And yet, many taxpayers will actually have an unexpectedly small refund, or balance due, thanks to inaccurate withholding. It's a cliche I hardly ever use, but for sure THIS upcoming tax season will be a fun one!

Based on the tax projections I've done so far, this appears to be ringing true. Albeit, it's a fairly small sample size.

Nilodop wrote:

"The first $100k of interest on this debt had been deductible." Don't think so.

I'm with Lenny on this.

Has anyone made any progress in nailing down the *real* definition of the word "such" as that word is used in IRC Section 163(h)(3)(B)(i)(II)?

When the TCJA was first passed and people were reading and commenting on parts of it, more people than just myself thought no equity debt interest would be allowed. I haven't really spent a lot of time since early this year getting to know the TCJA until now since tax season is pretty much over in my office and I now have the time and I was surprised to read that some part of equity debt can still be deductible. There were so many questions on the equity debt issue that on Feb 21 IRS issued an advisory, and throughout that advisory they refer to equity debt, HELOCs, LOCs, they are clarifying what will still be deductible, and my CPE material is not faulty, it is stating what the IRS advisory states, and what some of you in this discussion have stated, that under certain circumstances equity debt will still be deductible and that the $100,000 limit on that type of debt no longer exists and is replaced with the overall $750,000 limit on mortgage interest. Here is a link to the IRS advisory:

https://www.irs.gov/newsroom/interest-o ... er-new-law

Prior to TCJA a homeowner could deduct interest on the first $100,000 of a equity debt no matter what the funds were used for subject to the $1,000,000 limitations and the debt had to be secured by the home in question. That no longer exists.

Discussion is good for the soul and that was the purpose of starting this thread. Thanks to those who have participated

When the TCJA was first passed and people were reading and commenting on parts of it, more people than just myself thought no equity debt interest would be allowed.

No equity debt interest is allowed. Just because a bank calls the loan a HELOC, LOC or anything else in their marketing does not provide any information regarding the tax classification of the loan. The tax classification is based on tracing the funds.

"Responding to many questions received from taxpayers and tax professionals, the IRS said that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled. The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements."

IRS Tax Advisory of February 21, 2018

...regardless of how the loan is labelled...

...loan used to build an addition to an existing home is typically deductible...

...loan used to pay personal living expenses, such as credit card debts, is not.