With the stroke of the pen on December 22, 2017, the first major piece of tax legislation in over 30 years was signed into law. Among the changes that were made in almost all areas of taxation, one of particular importance to many Americans – treatment and deductibility of mortgage interest.

So that begs the question – is home ownership still worth it? We definitely think so! The good news is the maximum potential of interest deduction is still available for the majority of Americans. But don’t stop reading just yet. There are still some changes to the treatment of mortgage interest you’ll want to take into consideration, especially when considering a Home Equity Line of Credit (HELOC) or loan.

Prior to the Tax Cuts and Jobs Act, the magic number for married taxpayers was an aggregate limitation of $1,000,000 of debt (or your outstanding mortgage balance) for deductibility and $100,000 applied to home equity debt. This means that prior to law changes, a married couple could have $1,100,000 in qualified residence interest debt of which $100,000 could be used for purposes other than acquiring or constructing the residence, like refinancing credit card debt or paying college tuition.

Two important changes in legislation came on December 22^nd, both effective through 2025. We’ll list those changes here followed by some common questions to fill in the blanks.

Remember that $1M figure we mentioned? Well, it’s now $750,000. However, if the debt was incurred before December 15, 2017, the old $1M limitation still applies. So, for the majority of first-time homebuyers and even move-up homebuyers in our region, owning a home still remains one of the best investments you can make. 

The second relates to the $100,000 home equity (HELOC) debt deduction, which for taxable years 2018 and beyond, has been limited for only certain purposes.

As a local community bank, we receive many questions about the impact of these changes for our customers. Here are several of the top concerns customers like you are facing with the new law:

1. Are existing HELOC loans grandfathered against the removal of the $100k home equity deduction?

No loans are grandfathered, however the exact use of the debt matters. Interest paid may continue to be deductible if used for acquiring, constructing, or improving the residence.

2. If I have multiple homes, is the $750,000 limitation per residence, or cumulative?

Short answer: cumulative. The new law did not change the definition of qualified residence and interest continues to be deductible subject to the overall debt limitation.

3. How do the new rules affect a refinance of an existing mortgage?

Individuals can refinance up to the amount of existing debt, including if the debt is in excess of $750,000, so long as the debt was incurred before December 15^th, 2017.

4. What about ‘cash-out’ refinance transactions?

Interest from cash distributions to borrowers is still deductible, assuming funds are used for acquiring, constructing, or improving the residence, subject to the overall limitation. That doesn’t mean you can’t do a cash-out refinance or home equity loan for purposes other than home improvement – however, the cash-out portion of your loan will not be deductible.  

While the changes under the Tax Cuts and Jobs Act can be a lot to digest, the American Dream of home ownership is still also a great investment for most. A mortgage loan representative from First Northern Bank can help guide you through the mortgage process.  Learn more

Disclaimer: First Northern Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. Please consult your own tax, legal or accounting advisor for further information.

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Source: American Bankers Association | aba.com