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    New Tax Act & HELOC Interest Question

    We have a few clients who have refinanced their home mortgages (home acquisition debt) over the past few years into what is now listed on their Forms 1098 as either HELOC, EQ Line, Line of Credit, etc. We have continued to deduct the Mortgage Interest on these as home acquisition debt up to the $1 million limit because in each case we can see that they paid off their original mortgages with these HELOC’s and Pub 936 states that “any secured debt you use to refinance home acquisition debt is treated as home acquisition debt.” So…my question is: does the suspension on the deduction for home equity indebtedness in the new tax bill eliminate these deductions too? Even though these HELOC balances were all originally home acquisition debt? The wording in the bill leads me to believe that ALL HELOC interest is out, but before we advise our clients to refinance, I just wanted to get some opinions.

    #2
    If the HELOC proceeds were used for "acquisition debt" then you are ok. with the deduction post TCJA!

    Acquisition debt includes home improvements. But if they took that money to buy a car, go on vacation etc. it is no longer deductible.
    Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR

    Comment


      #3
      I haven't read the specific wording in the new bill but, if it is as you say and if they changed the wording in Pub 936 then I would say HELOC is not deductible. Only option would be to have client pay off HELOC by refi of home mortgage.
      Believe nothing you have not personally researched and verified.

      Comment


        #4
        The wording in the bill leads me to believe that ALL HELOC interest is out
        What wording are you looking at???


        I agree with ATSMAN. Any acquisition debt is still deductible (money used to buy, build or substantially improve the home). That includes HELOC loans.

        Comment


          #5
          How are we to know

          Originally posted by ATSMAN View Post
          But if they took that money to buy a car, go on vacation etc. it is no longer deductible.
          There is no way for the preparer to know what they spent the money for if the client doesn't honestly tell us.

          Comment


            #6
            Use of HELOC funds

            Originally posted by Snaggletooth View Post
            There is no way for the preparer to know what they spent the money for if the client doesn't honestly tell us.
            BINGO !!

            The only potential thing to muddy up the waters is all of the "extra" information that now appears on every Form 1098.
            Of course, whether the IRS ever is concerned with such information is the greater question.

            FE

            Comment


              #7
              Originally posted by Snaggletooth View Post
              There is no way for the preparer to know what they spent the money for if the client doesn't honestly tell us.
              Going forward we need to ask the taxpayer that question and record the answer. So let's say they used the money to buy a new car but told us they remodeled the kitchen, as long as you note it and go by what they told you you are ok. IRS may have a problem with the taxpayer.

              I see a due diligence question coming soon!
              Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR

              Comment


                #8
                So my question becomes Are we back to interest tracing rules for HELOC'S or does this apply only to HELOC'S taken in 2018?

                Comment


                  #9
                  Originally posted by TaxGuyBill View Post
                  What wording are you looking at???


                  I agree with ATSMAN. Any acquisition debt is still deductible (money used to buy, build or substantially improve the home). That includes HELOC loans.


                  Originally posted by TaxGuyBill View Post
                  What wording are you looking at???


                  I agree with ATSMAN. Any acquisition debt is still deductible (money used to buy, build or substantially improve the home). That includes HELOC loans.

                  I was looking at the wording in the bill...H. R. 115-466 - TAX CUTS AND JOBS ACT...SEC. 11043. LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE INTEREST.
                  (a) IN GENERAL.—Section 163(h)(3) is amended by adding at the end the following new subparagraph:
                  ‘‘(F) SPECIAL RULES FOR TAXABLE YEARS 2018 THROUGH 2025.—
                  ‘‘(i) IN GENERAL.—In the case of taxable years beginning after December 31, 2017, and before January 1, 2026—
                  ‘‘(I) DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST. Subparagraph (A)(ii) shall not apply.

                  I have also read (or maybe misread?) several interpretations of the bill that led me to believe that interest on a HELOC would not be deductible, no matter what it was for, acquisition debt or not. Sitting on my desk right now, for example, is "An Overview of the 2017 Tax Legislation: Impact to Individuals" that was "prepared by PricewaterhouseCoopers and provided by Morgan Stanley Wealth Management" and forwarded to me by a client. On this topic it states in the Post-reform 2018 Tax Rules column: "Interest on a HELOC is no longer deductible."

                  I guess I was reading both the tax bill language and the various interpretations to say that any interest associated with a HELOC is no longer deductible, period. But I see your point that as long as we ask the question and document the answer, that the funds were acquisition debt used to buy, build or substantially improve, then it should be ok post-TCJA.

                  Thanks to all for the input and good points.

                  Comment


                    #10
                    I was looking at the wording in the bill...H. R. 115-466 - TAX CUTS AND JOBS ACT...SEC. 11043. LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE INTEREST.
                    (a) IN GENERAL.—Section 163(h)(3) is amended by adding at the end the following new subparagraph:
                    ‘‘(F) SPECIAL RULES FOR TAXABLE YEARS 2018 THROUGH 2025.—
                    ‘‘(i) IN GENERAL.—In the case of taxable years beginning after December 31, 2017, and before January 1, 2026—
                    ‘‘(I) DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST. Subparagraph (A)(ii) shall not apply.

                    Yes, "Home Equity Indebtedness" interest is disallowed. But did you read how the Code defines "Home Equity Indebtedness"? The definition basically says it is non-acquisition debt.


                    (C) Home equity indebtedness
                    (i) In generalThe term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed—
                    (I) the fair market value of such qualified residence, reduced by
                    (II) the amount of acquisition indebtedness with respect to such residence.
                    (ii) Limitation

                    The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual).


                    https://www.law.cornell.edu/uscode/text/26/163#h

                    Comment


                      #11
                      TaxGuyBill - No, I admittedly had not read the definition in the Code, so I appreciate the link. It is definitely clearer now....TCJA only eliminates the deduction for HELOC interest that is NOT acquisition debt. Thanks for your guidance!

                      Comment


                        #12
                        Originally posted by mactaxes View Post
                        TCJA only eliminates the deduction for HELOC interest that is NOT acquisition debt. Thanks for your guidance!
                        It also eliminates the deduction for first mortgage interest that is not acquisition debt, like a cash-out refinance where the cash out wasn't used to buy build or improve. It doesn't matter at all what kind of mortgage it is, only what kind of debt it is for tax purposes.

                        Comment

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