As we enter the middle of the 2021 tax season, I hear a lot of people asking the following questions about their mortgage interest: “Can I still deduct my mortgage?” Home equity line of credit? Do I have to refinance to make it tax deductible again? How do I know if I can deduct the Home Equity Line of Credit (HELOC) interest? ”Below, we’ll answer your questions and more.
Home Equity Lines of Credit (HELOC)
This mortgage tax relief continues to confuse many homeowners when filing their tax returns. Changes to the mortgage tax deduction in the Tax Cuts and Jobs Act (TCJA) 2017. I have expressed over the years how bad these changes are for most of my owner clients.
For many homeowners, there are many instances where interest on a HELOC may be deductible, but there are also times when HELOC interest is not tax deductible. For those who own valuable real estate, only part of your mortgage and home equity loan are tax deductible. It all depends on your particular situation and is primarily based on your mortgage balance and mortgage debt usage.
Like a Los Angeles Financial Advisor, many of my clients live in communities with high real estate values. The Tax Cuts and Jobs Act of 2017 is screwing up many people who have become accustomed to receiving tax relief for the interest they pay on home equity loans and lines of credit. Some will see their tax breaks reduced, others will see their entire tax deduction removed.
To help reduce the confusion, the Internal Revenue Service (IRS) has issued a notice that you can read here. In the opinion, we get some of the details of what will be deductible and what will not. For the 2018 to 2025 tax years, you will not be able to deduct HELOCs. There are, however, a few exceptions. If you plan to benefit from this deduction, your loan must be used to “buy, build or substantially improve” the residence that secures the underlying loan.
Which debt is or is not eligible for the mortgage deduction?
If you are using the home equity loan for home renovations, you can still deduct the interest. This would apply to things like replacing the roof, adding solar panels, or renovating a kitchen or bathroom. I am sorry to inform you that furniture and interior design are not eligible expenses.
On the flip side, if you’re just plundering your home equity to fund a lifestyle that your income won’t support, you won’t be able to deduct interest on your home equity. Your plan to pay off your child’s college expenses with the equity in your home could also be messed up. Likewise, you can no longer use the money to pay off credit card debt, student loans or use it to buy that new electric car you’ve been dreaming of. Ultimately, what you use for the money is up to you. Whether or not this use is deductible is up to the IRS.
Limits on Home Equity Loan Tax Deduction Amounts
Typically, homeowners can deduct interest paid on HELOC debt up to a maximum of $ 100,000. The new regulations contain fine print that you probably weren’t aware of. The HELOC deduction is limited to the purchase price of the house. This can trip up some of you who have owned your home for decades or maybe bought a real renovator. For example, let’s say you bought a house for $ 70,000 and plan to put a ton of work into it. In this case, you will only be able to deduct interest paid up to $ 70,000, if you are using a HELOC. That’s not a big deal in Los Angeles, where $ 70,000 doesn’t allow you to buy a studio condo (probably barely an outhouse…), but it can be a bigger problem in many other parts of the world. country.
Also note the new tax plan lowers dollar limits on traditional mortgages. This change came into effect in 2018; taxpayers can only deduct interest on $ 750,000 of home loans. This only applies to homes purchased after December 16.e, 2017. Homeowners who bought their home before this date can still deduct up to $ 1 million in primary mortgage debt.
Another thing to know is the fact that the limit of $ 750,000 applies to the combined total of all debts on all properties owned. For example, if you have a mortgage of $ 400,000 on your primary residence and you owe $ 350,000 on a house in Palm Springs, the total amount receives tax relief. But if your primary residence is $ 750,000 and your secondary residence is $ 250,000, you will only get tax relief on $ 750,000, and none of your interest paid on the secondary residence would be deductible.
For my single readers, there is a bit of good news here. Two singles could potentially deduct a combined mortgage debt of $ 1.5 million ($ 750,000 each) if they bought a home together. A married couple, however, would be limited to $ 750,000.
If you find your head is spinning after reading these tax laws, you are not alone. Mortgage deductions and other tax breaks for real estate can be confusing. The main point to remember is to be proactive, so that you don’t end up with an exorbitant tax bill when filing in 2021. The more you earn, the more valuable the tax breaks can be.