Mortgages and the New Tax Code

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Published by Dan Morrison

As a note, those planning on tapping equity for college expenses for children or grandchildren will also need to reconsider their options. While taxes can’t be the only factor in any decision, they are a crucial component to your overall financial picture.

Recently, I’ve been working with a couple whose goal is to purchase a home near the shore. Grandkids are on the way in a few years (at least that’s their hope!), and they imagine this to be a wonderful way for them to spend time with their family on summer vacations.

Originally, the plan for the purchase was straight forward – a strategy many have used. They own their present home with only a small mortgage. The plan would be for them to borrow the needed funds from the equity of their current home, buy the second home outright (which they would ultimately retire to) and then pay off all loans in a few years when they sell their existing home. Given their time frame, this seemed like the most cost-effective option.

Unfortunately, the Tax Cuts and Jobs Act of 2017 derailed those plans. In February, the IRS clarified the deductibility of interest on Home Equity Lines of Credit (HELOCS) and Equity Loans. Any loans taken out AFTER December 15th, 2017 would be subject to new limitations. From that date forward, only interest from loans that are used to improve the primary property can be deducted. Previously, you could deduct interest on all equity loans or lines, regardless of the intended use of the funds. The only limitation was that interest was only deductible on the first $1 million of aggregate debt.

Now, my clients must decide between the two remaining options: refinance their current mortgage, incorporating the new money needed, or take a mortgage out on the new home at purchase. These are the only ways to maintain interest deductibility. Additionally, the aggregate debt limit has been lowered to $750,000.

As a note, those planning on tapping equity for college expenses for children or grandchildren will also need to reconsider their options. While taxes can’t be the only factor in any decision, they are a crucial component to your overall financial picture.

Creating a thought-out and simple plan can help guard against surprises that have resulted from the new tax code. To begin the plan-making process please complete our Risk Tolerance Questionnaire and set up a client profile.

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