Dear Carrie, My wife and I have a $500,000 mortgage on our house and now want to tap into our HELOC, partially to renovate the kitchen but also to pay off credit card debt. Under the new tax law, how much mortgage and HELOC debt can we deduct from our taxes? —A Reader
Dear Reader, As you might imagine, the Tax Cuts and Jobs Act of 2017 created a bit of confusion around the tax-deductibility of mortgage interest in general and home equity lines of credit (HELOCs) in particular.
Under the old tax rules, you could deduct the interest expense on up to $1 million (if you were single or married filing jointly, or $500,000 for married filing separately) of home-secured debt used to purchase or make capital improvements on your qualified principal and/or second residence. You could also deduct the interest expense on up to $100,000 ($50,000 for married filing separately) of home equity debt secured by your home, whether in the form of a regular loan or revolving line of credit.
The two were related — but separate — circumstances, and once you understood the limits, the rules were pretty clear. Not so much now. Here's why.
Let's start with the simplest. If you took out your mortgage before December 15, 2017, home-secured debt up to $1 million is grandfathered in. So you could still deduct the interest expense on up to that amount. After that date, the limit goes down to $750,000 if you are single or married filing a joint return ($375,000 for married filing separately).
Since your mortgage is $500,000, you're fine no matter when you took out your mortgage. You can deduct the interest expense on the entire amount.
A HELOC is another story, and here's where it gets more complicated. In the past, a HELOC was treated separately and the interest expense on up to $100,000 (single or married filing jointly) was tax-deductible no matter how the money was spent.
Under the new law, home equity loans and lines of credit are no longer tax-deductible. However, the interest on HELOC money used for capital improvements to a home is still tax-deductible, as long as it falls within the home loan debt limit. Dates are important here, too. If you used a HELOC for home improvement before December 15, 2017, it would be grandfathered in to the $1million limit. However, if you spent the money on December 15, 2017 or later, you'd be subject to the $750,000 limit.
In your case, with a $500,000 mortgage, you could deduct the interest expense on up to a $250,000 HELOC, as long as you spend that money on home improvements like your kitchen remodel. Your $500,000 mortgage plus a $250,000 HELOC would put you at the current limit.
Fortunately, the new laws and limits do still apply to the purchase and improvement of second homes. However, the total home-secured debt limit for tax-deductibility is still $750,000 for both homes. But this, too, can get complicated depending on the timing.
For instance, let's say you had two homes prior to December 15, 2017: a principal residence with an $800,000 mortgage and a vacation condo with a $200,000 mortgage. The interest expense on both would be tax-deductible under the old limit. Now let's say you sold the condo. If you subsequently decide to purchase a new condo, the mortgage interest would no longer be tax-deductible because, while your old mortgage would be grandfathered in, any new purchase would make you subject to the new, lower debt limit.
With the new tax-deductibility laws regarding the use of HELOC money, it's more important than ever to keep track of your home improvement expenses. Be sure to keep good records and have all receipts available come tax time to assure that you get the available tax deductions. This is something you should discuss with your accountant or tax advisor.
One more thought: Don't necessarily be deterred from using your HELOC to pay off credit card debt as you suggested just because the interest won't be tax-deductible. HELOC interest rates are still significantly lower than rates on consumer debt. Just be aware of the potential effect of rising interest rates, and make certain you don't rack up any more consumer debt. Good debt management is an important part of overall financial planning and can work to your advantage in the right circumstances.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at [email protected] The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Investors should consider, before investing in a 529 plan, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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