The new Tax Plan recently signed into law affects many homeowners, especially those that have a home equity line-of-credit (HELOC). HELOC loans are very popular among homeowners due to their low-interest rates and the option of deducting your interest payments in your taxes. Things are a little different now, but how different are they for you?

What is a Home Equity Line of Credit (HELOC)?

Home Equity Line of Credit or better known as HELOC (pronounced HE-lock) acts like a credit card: It has a credit limit you can borrow against, pay all or part of the balance, and borrow again up to the credit limit. The interest rate varies with the prime rate. Essentially, it’s still a loan but the only difference is that the interest rate is lower than all other types of loans because borrowers are required to use their home as collateral. According to Bankrate, “The first 5 or 10 years of a HELOC (the period varies by lender) are known as the draw period. During the draw period, you may borrow from the HELOC and the minimum monthly payments are interest only. After the draw period expires, the repayment period begins. Usually the repayment period lasts 20 years.” HELOC loans have been a very popular means for our clients to self-fund their long term care costs, such as paying for assisted living.

How Do the New Tax Laws Affect HELOC?

You Can no Longer Spend HELOC Loans on Anything and Everything

Not so long ago, homeowners were allowed to obtain a HELOC loan and not be limited to what they used the money for. According to a 2007 U.S Census report, “In the past, people would take out home equity loans to make renovations (45 percent), pay off their debts (26 percent), buy a car (9 percent), or pay for medical emergency/tuition (4 percent). As we can see, more than half of the homeowners in 2007 used their HELOC loan for something other than house renovation. This is called “Home Equity Indebtedness.” Unfortunately, due to Section 11043 of the new tax law, these type of HELOC loans are no longer eligible for interest tax-deduction, according to the Washington Post.

HELOC Loan Interest is No Longer Tax-Deductible

There are two types of HELOC loans, one was mentioned previously “Home Equity Indebtedness” and the other is “Acquisition Indebtedness.” As mentioned before, Home Equity Indebtedness interest will no longer be tax-deductible for homeowners, no exception. Meaning that if you obtained a “Home Equity Indebtedness” loan before the new law, you would still be subject to the new law and would no longer be able to tax-deduct your loan interest.

On the other hand, if you obtained an “Acquisition Indebtedness” loan, meaning that you can ONLY use the loan to acquire, build or substantially improve the residence, then you would be able to tax-deduct your loan’s interest. According to The Orange County Register, as long as all other terms are not violated, tax-deduction is still an option for  “Acquisition Indebtedness” HELOC loans.

Mortgage Debt Limit Has Dropped from $1.1M to $750K

According to CNBC under the bill homeowners who purchased a house before Dec. 15 of this year will be able to continue deducting the interest they pay on mortgage debt of up to $1 million. For purchases after that date, the cap drops to $750,000. That amount of mortgage debt can be for a primary or secondary residence (i.e., a vacation house). Earlier versions of the bill would have eliminated the tax break for second homes. This is for all total acquisition mortgage debt combined (i.e a split first mortgage and a HELOC).

Are you Asking “Am I Prepared for the New Tax Law?”

We know that everyone is unique and might have different situations. That’s why we encourage you to ask questions of your CPA if you have any concerns about your HELOC or other mortgages. If you don’t have a CPA, please contact us so at (925) 757-4605 so that we can refer you to an excellent local CPA to answer all of your tax questions.

Sources

• Bankrate
  https://www.bankrate.com/finance/topic/heloc.aspx
• CNBC, Sarah O’Brien
  https://www.cnbc.com/2017/12/20/here-are-the-finalize.html
• The Orange County Register, JEFF LAZERSON
  https://www.ocregister.com/2017/12/28/heloc-loans-might-still-be-deductible-under-new-tax-plan/
• Forbes, Nick Clements
  https://www.forbes.com/sites/nickclements/2017/12/28/borrowers-lose-home-equity-tax-deduction/#3c54f5676cdf
• MarketPlace, Jana Kasperkevic
  https://www.marketplace.org/2017/12/22/business/tax-bill-2017/tax-reform-home-equity-interest-deduction-affect.
• Census
  https://www.census.gov/prod/2007pubs/c2kbr-37.pdf
• Washington Post, Kenneth R. Harney
  https://www.washingtonpost.com/realestate/did-the-tax-code-overhaul-kill-home-equity-loans/2018/01/16/626f8054-facf-11e7-ad8c-ecbb62019393_story.html?utm_term=.484075c08a87