Whether you are already a homeowner or thinking about buying your first home, the new tax laws—officially known as the Tax Cuts and Jobs Act (TCJA)—will challenge how you think about your home loans, especially your Home Equity Line of Credit (HELOC).
In addition to flatter tax brackets, TCJA eliminates many popular deductions for individual taxpayers, and puts new limits on those that remain. Whether you benefit from these changes. and to what degree, will be a function of where you live, how much debt you currently owe, who makes up your household, the type of debt you have, and how much you make.
To understand exactly how you will be impacted, you will need to work through a projection with a tax professional. Until you do, here is a summary of some of the key home-related changes.
Mortgage interest remains deductible for most homeowners. The deduction is available on acquisition indebtedness – debt incurred in acquiring, constructing, or substantially improving a qualified residence – that does not exceed a total of $750,000. The previous cap on total mortgage debt of $1 million remains in effect for existing mortgage holders.
Property, state income, and local taxes, which had been deductible on your federal return, are now limited to $10,000. This is especially significant for individuals living in states with high income taxes and those in areas with high property taxes.
Interest on home equity lines of credit, may no longer be tax deductible. This takes effect for tax years beginning after December 31, 2017, and the suspension remains in effect until 2025.
Offsetting the elimination of these deductions is a jump in the standard deduction. For 2018, the standard deduction will rise to $12,000 for individual filers and $24,000 for those who are married and filing jointly. For many households, this boost could more than offset the loss in their itemized deductions and lower their overall federal tax bill, even after their home-related deductions disappear.
But What About Those HELOCs?
Homeowners with home equity-based debt may want to meet with their Loan Officers, as soon as possible. With the Federal Reserve expected to raise the level of interest rates three times this coming year and most HELOCs priced to move up with them, the attractiveness of this type of loan would have diminished even without TCJA. Now without the deduction, HELOCs are likely to be even more expensive to use versus other alternatives.
Chief among the alternatives is a cash out refinance. With long-term mortgage rates still low, this type of borrowing enables HELOC users to retire their home equity loan product and combine the outstanding balance into a larger mortgage. Assuming the new mortgage does not exceed the $750,000 threshold, the interest paid would then qualify for the deduction for those still planning to itemize.
Given the degree to which the standard deduction rose, after meeting with your Loan Officer you should also discuss your circumstances with your tax professional to determine what course of action will lead to the best after-tax outcome for you.