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The new mortgage interest deduction

PostPosted: 14-Jan-2019 9:38am
by makbo
Lost in all the early anxiety about QBI seems to be something else that will affect far more taxpayers -- the loss of deduction for equity mortgage interest. The DIYers will probably just ignore it for the most part and continue to plop the Form 1098 number into their return, unadjusted.

My best tactic so far is to compare the mortgage balance reported on Form 1098 to the assessed value for property tax purposes, which in California is actually a somewhat realistic indicator of the cost of purchase/improvement (thanks to Prop 13). Of course there are lots of exceptions to that, but it's a starting point that does not require any time spent with client. If the numbers are reasonably close, I'll probably just assume it's all acquisition debit.

And yes, I always considered this issue when it came to AMT adjustments, even before TCJA, but it was the rare client who was both subject to AMT and who also paid equity debt interest. Now it's potentially every client who itemizes with mortgage interest.

Re: The new mortgage interest deduction

PostPosted: 14-Jan-2019 10:12am
by jon
Am I missing something. If the equity mortgage interest was used for improvements it is OK, but if you were just using up the $100,000 that becomes the problem if it is on an equity line, and is it not also a problem it it was refied into a new mortgage??

Makbo are you making our tax season sleep even mor difficult??

Re: The new mortgage interest deduction

PostPosted: 14-Jan-2019 10:23am
by Seaside CPA
I think this is going to be a big pain on home equity loans. For example, myself, we took a draw off of ours to replace two heat pumps a couple of years ago. Before it was paid off, we replaced our roof and also drew a portion off of the h/e loan. Occasionally took a few draws, for expenses for our two kids in college. Then had to take a draw to pay for the funeral of a family member. All of the above was done over a 2-3 time period. Don't have the details of the dates disbursed, etc. and in 2018 we refinanced the home equity loan with another lender. Not even dealing with the old lender at this point.

I'm just hoping a lot of people with these types of home equity loans will not be able to itemize, and then it will not be an issue. For those that can, going to take some time to calculate the deductible portion.

Re: The new mortgage interest deduction

PostPosted: 15-Jan-2019 1:10am
by Joanmcq
Whenever my clients refi I ask for the HUD statement. I can easily see if money was pulled out, and then ask additional questions if necessary

Re: The new mortgage interest deduction

PostPosted: 15-Jan-2019 7:53am
by Taxalmancer
In my experience, during the years of real-estate value escalation, such as we've seen in most areas from 2009-2019, clients often would use the rising value as a piggy bank for funding college education. Clients would borrow, rates would decrease, and values would escalate making a fertile opportunity to grab cash. They'd get a home equity then refinance when rates declined, again.

Each year, I'd ask clients if they've borrowed money that was not used for the home's acquisition of for improvements. We'd go through an analysis to see what portion of the reported mortgage interest was not deductible for regular tax and what portion was subject to addback for AMT purposes. It wasn't always precise to the dollar but it was a good-faith attempt to surgically remove tainted uses of mortgage proceeds. That schedule would get moved up to the next year's file.

What becomes troubling is when you take on a new client, ask for this information, and are greeted with a frosty, "Why do you want to know that. We've never done THAT before." Shoot the messenger scenario. More than once I've lost (or not taken on) a potentially-new client due to this issue.

I think the issue will go away for many clients this year. For those in states that have decoupled, the old rules are still in play and the questions and calculations painfully continue.