The Tax Cuts and Jobs Act caused consternation for taxpayers and tax preparers because when it was signed into law in December, it was unclear whether interest in an equity line of credit or second mortgage would be deductible.
It wasn’t until the Internal Revenue Service released guidance for taxpayers in February that it was confirmed that homeowners can deduct interest on HELOCs and equity mortgages, with a few caveats.
Overall, there is a new limit on the deductibility of home loan interest. According to the IRS, you may deduct the interest owed on loans of up to $750,000 for married couples. That means that you can deduct interest on loans that in the aggregate do not exceed $750,000 if you are married or $375,000 if you are single.
If your home loan and equity loan together exceed those limits, a portion of the interest will not be deductible. In addition, the loans must be used to purchase a home or to repair or improve the property.
HELOCs and second mortgages will no longer be deductible if the loan proceeds are used to pay for personal items, including college tuition, vacations, credit card debt, student loan debt, a vehicle or clothing; the interest paid on that amount will not be deductible.
Finally, the HELOC, mortgage or second loan must be on a qualified residence. That usually means that the residence must be your primary residence or a second home.
In a separate column, we gave an example of how the new tax law limits the amount you can deduct from your income taxes. This is commonly referred to as “state and local taxes,” or SALT.
The new tax rule states that you can deduct up to $10,000 in real estate property taxes and state income taxes. This means that if your property taxes and state income taxes together exceed $10,000, you can take a deduction of only up to $10,000 on your federal tax return. Previously, you were able to deduct any amount of state tax and real estate tax you paid.
These are deductions, not tax credits. A tax credit would reduce the amount of taxes paid by the amount of credit on a dollar-for-dollar basis. A deduction reduces the amount of your taxable income. So if you have a $5,000 or $10,000 deduction and your taxable income is $100,000, the IRS will tax you on $90,000 of income.
Of course, nothing is simple when it comes to federal income taxes, and there are other variables that come into play. So please consult with your tax preparer for details.
As an aside, the IRS released a new calculator to help employees understand whether their employers have correctly recalibrated their paychecks in light of the Tax Cuts and Jobs Act. Here’s a link to the new IRS Withholding Calculator: irs.gov/individuals/irs-withholding-calculator.
Ilyce Glink is the creator of an 18-part webinar and e-book series called “The Intentional Investor: How to be wildly successful in real estate,” as well as the author of many books on real estate. She also hosts “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.