Slowly, but surely, the understaffed and overtaxed Internal Revenue Service is producing guidelines that will help us help you to understand how they plan to regulate the changes that the Tax Cuts & Jobs Act (PL117-95)- and the budget resolutions of February 2018 (I have a blog post describing these coming soon)- have brought.

Today (when this was written), the IRS release described how they plan to regulate those HELOC (home equity line of credit) loans. Because the law implied that they would not be allowed. But that was true ONLY if the name of the loan and the substance of the debt behind the loan mattered more than the substance of the loan.

First, a quick recap. Up until 2017, we were all allowed (but most of us couldn’t afford) to have mortgages of $ 1,000,000 – topped off with an additional $ 100,000 of home equity debt. Most people never reached that first number, but a slew of us even exceeded the second one (which meant part of the interest under that HELOC was disallowed). Moreover, only two homes could be included in those capped levels.

As of 2018, PL117-95 set that maximum mortgage interest deduction to be $ 750,000- for NEW mortgage loans. Existing mortgage loans were grandfathered and would be allowed to be used on Schedule A itemizations. (Now, you begin to see why the 1098’s – the notice the bank provides you of the mortgage interest paid- list the origination date and the address of the home being mortgaged.) And, as I said, the law implied that HELOC’s could be disallowed.

You can thank the IRS for its new clarification, IR-2018-32. It simply says that “taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled.” The clarification covers us through 2026, when all these personal tax provisions expire and the old law comes into play. (If you believe that, please buy my rocket ship to Pluto; it’s only $ 220 million- and I promise to start building it once you give me the money.)

But, what the IRS giveth, always involves an IRS taketh. This clarification ONLY applies (again, through 2026) for such equity loans that “are used to buy, build or substantially improve the taxpayer’s home that secures the loan.”

The IRS really has no choice. Because PL117-95 unequivocally states (Section 11043, and then one has to jump back to the original statute 26USCode, Section 163, Interest) that any re-finance or home equity loan must be secured on our qualified residence and that loan cannot exceed the value of the home as purchased PLUS improvements- and (now) does not exceed that $ 750K threshold.

(By the way, Publication 936, Home Mortgage Interest Deduction, is only accurate for 2017 tax filings. A new edition has not yet been issued, which means it doesn’t apply to calendar year 2018. Hence, this February 2018 guidance.)

So, we can take out an HELOC or refinance our home ONLY if we plan to add an addtion, redo the bathrooms, put on a new roof, or other similar home improvements.

To pay for our kids college tuition, a new car, pay down credit cards- Whoosh! Not so fast- those won’t let you deduct the mortgage interest.

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