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3 Ways the New Tax Bill Impacts Homeowners

Key Takeaways

  • The interest you can deduct on mortgage and home equity debt is now limited to combined balances of $750,000.
  • You can only deduct interest paid on home equity debt if it is used to acquire, construct, or substantially improve the residence.
  • Moving expenses are no longer deductible, except for military exemptions.

A new tax bill was signed into law on December 22, 2017. The new legislation will have a major impact on all consumers in 2018 and beyond, but how does it directly impact you?

If you’re a homeowner, the following areas could impact your future tax deductions as a result of the Tax Cuts and Jobs Act.

1. Mortgage debt

Prior to the new tax bill, homeowners could take itemized interest deductions on combined mortgage and home equity balances (incurred to acquire, construct, or substantially improve a qualified residence) up to $1 million over multiple homes. If you bought your property before December 15, 2017, nothing will change for you.

However, if you obtain a new loan after December 14, 2017, then you can only deduct interest on combined debt balances up to $750,000 ($375,000 if married and filing separately).

2. Home equity borrowing

Home equity loans or home equity lines of credit (HELOCs) tend to be lower-interest lending options people use for any number of reasons, including home renovation projects and consolidating credit card debt. Prior to the new tax bill, most people could deduct the interest paid on that loan or line up to $100,000.

Now, under the new tax law, you won’t be able to deduct the interest paid unless the loan or line of credit is used for improving your home. That goes for new home equity loans and HELOCs, as well as existing ones. You must meet the definition of “acquisition indebtedness” under IRS section 163, which states the funds “must be incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer.”

In other words, to deduct interest from your home equity loan or HELOC going forward, you must have the necessary documentation to prove to the IRS that the loan was used to make improvements to your property.

Note: If you have a home equity loan or HELOC that is not being used for improvements and decide to refinance it into a new mortgage, you will no longer be able to deduct the interest paid on this portion of the refinance.

3. Moving expenses

Are you relocating for a new job? If so, the new tax bill could impact you.

Prior to the new tax bill, you could deduct your moving expenses on your taxes if you were relocating your home to start a new job. However, starting in 2018, those moving expenses are no longer deductible, outside of military exemptions.

What to remember

The new tax bill could have an impact on how people pay back their homes, as well as how they use their homes to fund other goals. For example, someone using a home equity loan to consolidate credit card debt can no longer deduct the interest and use the tax savings from that deduction to help fund their summer vacation. Reach out to your lender or mortgage officer to see exactly how this will impact you.

More information

We are committed to helping you reach your potential by providing personalized solutions to fit your financial needs. To learn more about home lending options, please visit us online or Ask a Citizen at your nearest Citizens Bank branch. For questions about the recent tax law changes, visit the IRS website.

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