2018 home equity interest

[Rapid Robert]

There is nothing we'll do differently in 2018 than we should have been doing all of these years. If a client has a mortgage, home equity LOC, or a combination of the two, we've always needed to determine how much of the total debt was acquisition indebtedness. Once we know that, we can then determine the deductible interest.

The only thing different in 2018 is there will be no deduction interest on home equity indebtedness (indebtedness other than acquisition indebtedness secured by a qualified residence).

Correct -- a good tax preparer has known that for the past 30 years, it was necessary to distinguish between acquisition and equity debt. Correct -- the definition of what is "acquisition" and what is "equity" has been in the tax code for 30 years. Correct -- a lot of the tax "reform" was just moving AMT rules into the regular tax code - no exemption, high standard deduction, no deduction for interest on equity debt, limited or no deduction for state income taxes. For those who have always said they hated getting "hit" by AMT, they now will be "hit" every year by what amounts to the same thing as AMT, except with lower overall rates.

[ttbtaxes]

There is nothing we'll do differently in 2018 than we should have been doing all of these years. If a client has a mortgage, home equity LOC, or a combination of the two, we've always needed to determine how much of the total debt was acquisition indebtedness. Once we know that, we can then determine the deductible interest.

The only thing different in 2018 is there will be no deduction interest on home equity indebtedness (indebtedness other than acquisition indebtedness secured by a qualified residence).

[New York Enrolled Agent]

Was substantial in the definition of home improvement before this new law?

Well before this new law - The Revenue Act of 1987 amended §163(h)(3) to include this language [emphasis added].

(B) Acquisition indebtedness

(i) In general. The term "acquisition indebtedness" means any indebtedness which -

(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and

(II) is secured by such residence.

[TAX4US]

I can see a whole lot of cans of worms being opened by over zealous banks and loan managers and very creative TP's. Most of the 1098's don't break this stuff open and a lot of TP's will not remember what he did or why he did it. More ways for the service to look at us and say you should have asked MORE questions. I don't like being the scape goat. Just my 2 cents worth. Are we having fun yet?

[JON]

I apologize for calling Home Equity Line of Credit(HELOC) - it is referred to in the bill as home equity indebtedness, I think I am close here it states something like "interest on home equity debt is suspended". If that does not apply to home equity loans then you are correct. What debt are they referring to then? Did they really mean it applies only to the extra $100,000 that did not have to be used for acquisition or improvement, or as you have previously stated it does not apply to all home equity debts that can be traced to acquisition or improvements. You guys may be right and I argued that up to a month ago, when I could not show anyone that there was an exception to some home equity debt that could be still qualified mortgage interest.

If we get a 2018 1098-INT for qualified mortgage interest for Home Equity Debts you will be right. As my banker friend said - "your leaving that up to us" and I said I will need it if I can use it on the return.

[Kram BergGold]

Substantial

Was substantial in the definition of home improvement before this new law?

[New York Enrolled Agent]

. The problem I see is parsing out the money borrowed 10 years ago that was used for home improvement, to buy a car, to pay down credit card debt and what constitutes substantial improvement.

That question should have been asked 10 years ago or at any time there was borrowed money.

Home Equity Indebtedness (subject to the $100K limitation) was fully deductible for regular tax purposes. However, it was a preference item for AMT - the use of the borrowed funds should have been a topic for discussion.

[Kram BergGold]

HE used for HA is still deductible

Because of the disagreement on this question I searched out an answer. I found two reputable sources that say money borrowed against a house for substantial improvements to that house is considered part of home acquisition cost and interest is deductible on the first $750k of total acquisition debt. I am glad I asked this question so more of us would understand this. The problem I see is parsing out the money borrowed 10 years ago that was used for home improvement, to buy a car, to pay down credit card debt and what constitutes substantial improvement.

[Rapid Robert]

"IT", sorry. Look at TTBs recap or the bill.

I did. They agree with the law the way it is actually written. "Home equity debt (any debt secured by the residence that is not acquisition debt)"

Of course you will get 1098s for any kind of residential mortgage for 2018. The banks will report exactly the same as they did the year before.

You are also disagreeing with TaxGuyBill. I really feel sorry for your clients if you deprive them of legitimate interest deduction because you don't understand the new law (and maybe not the old law either).

You still can't even explain what HELCO is supposed to stand for.

edit - and I see you are disagreeing with New York Enrolled Agent also. Let readers make up their own minds about how reliable your interpretation is.

[New York Enrolled Agent]

I think the new act will overrule, if specifically states no interest deduction for HELCOs. Some of what you quote explains what resident interest is and tracing, and maybe it will be adjusted, but the act passed before and after states NO deduction for HELCOs.

This is what the new act ACTUALLY SPECIFICALLY says:

‘‘(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.

‘‘(II) LIMITATION ON ACQUISITION INDEBTEDNESS.—Subparagraph
(B)(ii) shall be applied by substituting ‘$750,000 ($375,000’ for ‘$1,000,000
($500,000’.

Subparagraph (A)(ii) is "eliminated" for tax years 2018-2025.
No where in the act is any reference to HELCOs, HELOCs or any other type of similar loan. The type of debt known as home equity indebtedness is now "out" - the borrowing instrument be it a mortgage or line of credit or whatever doesn't make the determination of the type of debt - the use of the money does. Re-read TGB's code sections - he's got it right

[JON]

"IT", sorry. Look at TTBs recap or the bill. The regs you refer to will be used for tracing and deciding on the deduction for Mortgage Interest. Re-mortgage to take care of that credit card debt, etc -still be there to test, but not for "home equity loans". You will not receive 1098s for 2018 on HELCOs, unless something gets changed.

Tracing was there and will still be there, except its only use is for mortgages, not HELCOS.

A local guy in politics when asked about it - said it was a compromise to keep mortgage interest in as a deduction. The standard deduction was doubled he said.


That is more than just my opinion, and you can have your. Something would have to be changed before I would agree HELCO even makes it to tracing after 2017, although at first glance I was on your side. Nowhere does it say HELCOs are OK to be called or tested for acquisition debt.

Argue with TTBs authors. They are also clear on what they think.

[Rapid Robert]

I think the new act will overrule, if specifically states no interest deduction for HELCOs.

It was actually a mortgage banker and a tax forum and seminar who convinced me of the wording in the tax act.

What do you mean by "if"? The new law is clear, and in no way does it specifically mention HELOCs. Feel free to prove me wrong.

Anyone who thinks that HELOCs receive some special treatment under the new law should really consider upping their annual CPEs, as they don't seem to understand the long-standing definitions regarding acquisition and equity debt.

Also, everyone else calls them HELOCs, not HELCOs. What is your version supposed to stand for?

"Just my opinion. "

I think you should be able to actually paste actual text from the actual law that backs up your claim. Or you could just check TaxGuyBill's previous post.

[JON]

I think the new act will overrule, if specifically states no interest deduction for HELCOs. Some of what you quote explains what resident interest is and tracing, and maybe it will be adjusted, but the act passed before and after states NO deduction for HELCOs.

Tracing and mortgage interest are still there for MORTGAGES not HELCOs. Technical Correction would be nice - has to pass the HOUSE and SENATE and signed by the President. REGs could follow - in 20 years per the IRS. Lenders are fine with it. Can an acquisition/improvement HELCO but refinanced as a mortgage and get the deduction. I believe the lenders are saying maybe. The dates seem to make it difficult. They can make money.

Lots can change, but I have become convinced for now previous regs do not work when it says now NO DEDUCTION for HELCOs.

It was actually a mortgage banker and a tax forum and seminar who convinced me of the wording in the tax act.

Even look in TTBs recap and I do not see any exception - home equity debt is gone, It does not say trace it back to see how you incurred it.

Just my opinion.

[TaxGuyBill]

If you want the legal gibberish and reasoning, here it is:

Starting in 2018, §163(h)(3)(F) has the "Disallowance of home equity indebtedness interest".

§163(h)(3)(C) says "The term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence ..."

§163(h)(3(B) shows "The term “acquisition indebtedness” means any indebtedness which—(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer"


In other words, the disallowance is for interest is for amounts not used for "acquiring, constructing, or substantially improving" the home.

[TaxGuyBill]

Deleted: Posted in wrong thread.