How the New Tax Plan Affects Your Mortgage OptionsSubmitted by Washington Wealth Advisors | Falls Church and Ashburn, VA on January 22nd, 2018
By Craig Strent
The new tax plan impacts all areas of your financial life. We want to help you prepare for the changes and optimize your tax planning. As such, we reached out to Craig Strent of Apex Home Loans, a mortgage specialist with over twenty years of experience, to give us a deep dive into how the new tax laws will affect your mortgage options.
Are you wondering how the new tax plan will change your situation as a homeowner or prospective buyer? You’re not alone. After a tumultuous course of revisions, the Tax Cuts and Jobs Act has brought forward several key changes to the rules that dictate your deduction, including changes to property taxes, interest deductibility, and home equity line rules. Let’s take a look at the new changes piece by piece.
Mortgage Interest Deduction
The new plan keeps the mortgage interest deduction on acquisition indebtedness (i.e. borrowed funds used to buy a home) and the direct refinance of it, but lowers the cap on how much interest you can deduct from $1 million to $750,000. This change only applies to mortgages originated after Dec. 15th, 2017, so if you’ve bought a home before then, you may be in luck! Mortgages created before this date are “grandfathered in,” meaning that homeowners who bought before that time can still deduct interest on up to $1 million.
One noteworthy mention here is that the $750,000 cap refers to your mortgage amount, not the home price. So, if you’re purchasing an $825,000 home with a 10% down payment ($82,500), interest on your whole mortgage amount ($742,500) will be deductible.
State and Local Tax Deduction
State and local property taxes under the new law are now subject to a $10,000 cap on the amount you can deduct. In states with high property taxes, or for wealthier homeowners, this change may have an impact, but lower rates in five of the seven tax brackets may offset any diminished deduction.
Home Equity Debt and Acquisition Indebtedness
A common misconception in the new tax law is that all interest on home equity lines of credit, home equity loans, or second mortgages is no longer tax deductible. In reality, what determines the deductibility of your mortgage interest is how the funds will be used rather than lien position (whether it’s a first or second mortgage). To illustrate this, let’s take a look at the types of home loan debt as categorized by the IRS:
- Acquisition Indebtedness is defined as any borrowed funds that are used to build, buy, or improve a property.
- Home Equity Indebtedness refers to any debt borrowed against your mortgage that is used for anything other than building, buying, or improving a property – paying for a car or education, or consolidating consumer debt for example.
Under the new tax law, all mortgage interest on a loan under the $750,000 loan amount cap that is categorized as acquisition indebtedness – i.e. the funds were used to buy, build, or improve your home – remains tax deductible. On the other hand, all mortgage interest categorized as home equity indebtedness – i.e. a home equity line of credit was used to pay for a vacation, consolidate consumer debt or finance education expenses – is no longer tax deductible.
What the New Rules Look Like in Practice
Let’s say you purchase a $500,000 primary residence using a $400,000 mortgage. You could then deduct the interest on the $400,000 loan because that amount is below the $750,000 cap and the funds were used to buy a qualified residence and are therefore categorized as acquisition indebtedness.
On the other hand, let’s say you buy a $500,000 house using all cash. Two years later, you decide to refinance and take cash out, putting a $400,000 mortgage on the home. If the funds are not used for home improvements, the interest on the loan would not be tax deductible because it would be categorized as home equity indebtedness.
Have You Already Refinanced Home Equity Debt Into A First Mortgage?
If you’ve already rolled your home equity debt into your first mortgage, it is important to consult with your CPA or Tax Adviser, as all previous interest you were deducting may no longer qualify under the new rules.
Questions? We’re Just a Click Away
Are you weighing your options for purchasing a home in a specific area or do you have questions about your existing loan? Contact us for an overview of potential tax implications and answers to your questions, or even to get you connected with experienced local tax preparers. Call our office at 703.584.2700 or email email@example.com.
If you have any additional questions about your mortgage, you can reach Craig Strent at 301.610.5480, by email to firstname.lastname@example.org or visit his website.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.
Disclaimer: Always consult a tax preparer when it comes deductibility – homeowners should not use this blog for tax advice solely.
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