With the new GOP Tax Plan now in effect for 2018 many people are wondering, “Can I still deduct my home equity line of credit? Should I refinance to make it tax-deductible again?” Or just “How do I know if I can deduct the Home Equity Line of Credit (HELOC) interest?” Some HELOCs will still be deductible under the Trump Tax Plan others will not. Is my Home Equity Loan Deduction Los Angeles still allowed? We will answer your questions and more below about your Home Equity Loan Los Angeles.

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

Home Equity Loan Deduction Los Angeles What You Need to Know

This issue tends to confuse many homeowners. There are quite a few cases where the interest on a HELOC can be deductible but there are also many times the interest will not be deductible. To add to the confusion, there will also likely be cases when only a certain portion of the home equity loan is deductible. It all depends on your specific situation.

I live in Los Angeles, and many of my clients live in locales with high property values. Californians feared the new tax law (The Tax Cuts and Jobs Act of 2017) – enacted last December- would completely screw those counting on deducting interest from Home Equity Loans and Lines of Credit.  Earlier proposals of the tax plan would have completely eliminated this deduction. Thankfully, that didn’t happen but the final plan did put quite a few limitations on this deduction for property owners.

To help reduce the confusion, the IRS issued an advisory which you can read here. From the advisory, we get some of the details of what will be deductible and what will not. For the tax years 2018 through 2025, you will not be able to deduct HELOCs.  There are, however, a few exceptions. If you plan on taking this deduction, your loan must be used to “buy, build or substantially improve” the residence that secures the underlying loan.

What does or does not qualify for the Home Equity Tax deduction?

If you are using the loan to do work on your home, you can still deduct the interest. Think of things like replacing the roof, adding solar panels or remodeling a kitchen or bathroom. I am sorry to let you know that furniture and artwork do not count.

On the other hand, if you are trying to use your home like a piggy bank to fund your lifestyle, you will not be able to deduct the interest. Your plan to pay for Junior’s college with home equity might also be out the window.  Likewise, you can no longer use the money to pay off credit cards or use it to buy that new car you’ve been eyeing. In the end, what you use the money for is up to you. Whether or not that use is deductible is up to the IRS.

Limits to Home Equity Line Amounts for Tax Mortgage Tax Deduction

Generally, homeowners may deduct interest paid on HELOC debt up to $100,000. But here is some fun, fine print you probably weren’t aware of. The HELOC deduction is limited to the purchase price of the home. This may trip up some of you who’ve owned your home for decades or perhaps bought a real fixer-upper. For example, let’s say you purchased a home for $50,000 and plan to put a ton of work into it. In this case, you would only be able to deduct interest paid up to $50,000 if using a HELOC.  If you live in LA you know there is no real estate for sale anywhere near that price point. You are more likely to have paid $1 million dollars for an LA fixer home.  From there you would use a HELOC to help fund expensive renovations.

Also, worth noting is the new tax plan lowers the dollar limits on traditional mortgages. Beginning in 2018, taxpayers may deduct interest on just $750,000 in home loans. This only applies to homes purchased as of  December 16^th, 2017. Homeowners who purchased their homes before that date can still deduct up to $1 million in principal mortgage debt.

Mortgage Deduction Limits applied to all Properties

Another thing to be aware of is the fact that the $750,000 limit applies to the combined total of all debt, on all properties, owned. For example, if you have a $500,000 mortgage on your primary residence and owe $250,000 on a home in Palm Springs the entire amount gets a tax break. But if your primary residence is $750,000 and your secondary home is $250,000, you would only get a tax break on $750,000 and none of your paid interest on the second home would be deductible. This again will be much more of an issue for Los Angeles homeowners, where real estate prices a well above national averages.  Even that second home in Palm Springs is pricey.

For my single readers, there is a bit of good news here. Two singles could potentially deduct a combined $1.5 million in mortgage debt ($750,000 each) if they went in together on the purchase of a home. A married couple, however, would be limited to $750,000.  Consider these things before saying I do if you both own a good amount of real estate.

Changes to the Home Equity Loans deduction is more likely to hit the average American family. As of writing this post, the median price of a home in the US is $207,000 according to Zillow.  That’s a far cry from exceeding the mortgage deduction limits. I love L.A., but my down payment back in 2007 was more than that.

The following are a few of the most common mortgage deduction questions we have been fielding recently:

I was able to deduct my home equity loan on my 2017 taxes I just filed, when does this change kick-in?

These changes begin with the tax year 2018. This means the new rules will affect the taxes you file in 2019.  You still have time to figure out if your loan will or won’t be deductible and make the appropriate adjustments to your budget or loans.

Will I still be allowed to use a HELOC to pay off other debt like student loans, credit cards or a car?

You can use your HELOC however you want. For example, if you wanted to buy a boat, a plane or go on a shopping spree, your HELOC could be used for those things.  But I don’t recommend using it for any of those purchases. The new tax law will only change what will be tax-deductible and what will not.   Paying off your credit card or student loans with a HELOC may still be a smart financial move, but it won’t give you a tax break.

How am I supposed to prove that the borrowed money was for eligible purchases?

I am currently in the middle of some major home repairs and I’m taking extra care to track my spending and save invoices from my contractor. How exactly the IRS will track or confirm eligibility has yet to be determined. Where you typically need to keep tax records for 3-7 years, you will likely need to keep HELOC home improvement records as long as you want to take a deduction on the loan’s interest.

Hopefully, the IRS will come out with some type of form or statement to show how much, if any, of the loan, is eligible for a deduction. Many homeowners may have a HELOC where only a portion ends up being deductible.

For example, let’s pretend that you owe a total of $100,000 on a HELOC but just $60,000 was used to for home improvement. Just for fun, let’s say you used it to put in a pool. The rest was used to consolidate other debt.  Using this scenario, only the portion used to improve the home (the pool) would help you lower your tax bill.

Should I refinance to get a bigger mortgage deduction?

This will depend on your overall situation. The costs of refinancing into a single, first mortgage will likely kill most of the tax savings for many homeowners. You’ll also want to check the math as interest rates are creeping up. Even a small increase on your large principal mortgage rate could also reduce or eliminate the tax savings from deducting interest on the HELOC portion of your debt.

If you find that your head is spinning, you’re not alone. This topic and many other parts of the GOP tax plan are confusing. The Trump tax plan will be especially rough on California homeowners. The main takeaway is to be proactive so you don’t get whacked with a sky-high tax bill when filing in 2019. It’s also important to note that while an estimated 90%+ of Americans will see their tax bill drop for 2018, the remaining 10% will see their taxes go up.  These individuals, most likely homeowners in high-tax states, will need to plan accordingly. Translate that a large number of the 10% of people get a big tax increase under the Trump Tax plan will be homeowners here in Los Angeles and through California.

Home Equity Loan Deduction Los Angeles changes are confusing.   Make a point to discuss them with your trusted financial planner and CPA.

Live For Today, Plan For Tomorrow.

DAVID RAE, CFP^®, AIF^® is a Los Angeles retirement planning specialist with DRM Wealth Management. He has been helping friends of the LGBT community reach their financial goals for over a decade. Nightline has called him a “Tax Wizard in an Expensive Suit” He is a regular contributor to the Advocate Magazine, Investopedia and Huffington Post as well as the author of the Financial Planner Los Angeles Blog. Follow him on Facebook or via his website www.davidraefp.com

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