A NEW INCOME OPPORTUNITY FOR 2018

HAPPY NEW YEAR!  May 2018 be less taxing.

While the new limitations on the mortgage interest deduction in the GOP Tax Act simplifies the Tax Code, it greatly complicates recordkeeping for taxpayers and potentially for tax professionals. 

As we know, under the Act interest on home equity debt, regardless of the amount of the debt principal, is no longer deductible.  Period.  There is grandfathering of existing acquisition debt interest rules – but there is NO grandfathering of existing home equity debt. 

I do believe in the original House version of the bill all existing mortgage debt was “grandfathered” – including home equity debt.  While I can understand, and agree with, the philosophy of limiting deductible mortgage interest to acquisition debt, for practicality sake I wish that existing home equity debt had been included in the grandfathering.

Going forward, it will not be a big problem for new home purchases made after December 15, 2017.  Taxpayers need to keep track of only acquisition debt on these mortgages – and perhaps new regulations for reporting information on Form 1098 may take care of this to a degree.  But taxpayers with existing mortgage debt incurred before December 16, 2017 will definitely need to separately track acquisition and home equity debt going back to day one! 

Taxpayers have always been required to keep separate track of acquisition and home equity debt, but, if my clients are any indication, I expect that few actually did - due to the allowance of a deduction for interest on up to $100,000 of home equity debt.  And how many of us have actually been doing this for our clients on an ongoing basis?   

I also expect that with the new law, clients will expect us as their tax preparer to keep track of their debt at least going forward.  And many will also want us to create separate schedules of acquisition and home equity debt for their existing mortgage loans so the proper amount of interest can be claimed. 

This is an opportunity for us to generate post tax-season income this year – when preparing an applicable client’s 2017 return we can explain the new mortgage rules and offer to generate separate historical debt schedules after the filing season, and a brief period of recuperation, for, of course, an additional hourly fee.   

I hope, and expect, that the existing rules and regulations for who can deduct mortgage interest - when it comes to situations like multiple owners making unequal individual payments and “equity ownership” - will remain in effect under the new Act, as well as the current rules and regulations for determining what is home equity debt. 

Currently any additional closing costs of a refinanced mortgage that are added to the principal of the new loan is considered home equity debt.  For example - clients purchased a home in 2011.  They have had only one mortgage, from the original purchase, and no home equity debt.  They refinanced the original mortgage in 2015 to get a better rate.  The principal balance on the original mortgage was $197,374.  The principal balance of the refinanced mortgage was $200,000.  They did not take any money “out”, and paid a little over $1,000 at the closing.  The difference is the closing costs for title insurance, inspections, fees, etc. etc.  These clients have acquisition debt of $197,374 and home equity debt of $2,626.    

And, also currently, if you have refinanced mortgage debt that combined both previous acquisition debt and home equity debt., the home equity debt is considered to be paid down first.  A client refinanced a mortgage to combine the purchase mortgage balance of $197,374 and the balance in a home equity line of credit of $90,000.  During a year he paid down $6,000 of the refinanced loan principal.  The $281,374 remaining principal is considered to be $197,374 of acquisition debt and $84,000 of home equity debt.

Finally, I hope, and expect, that taxpayers will still be able to elect to treat home equity debt secured by a personal residence as not being secured by the residence – so the interest on the debt is treated as deductible business interest on Schedule C or a deductible rental expense on Schedule E instead of home equity interest.  Unfortunately, investment interest is, at least I think (can anyone verify?), no longer deductible on Schedule A.

I will be rewriting my Mortgage Interest Guide, which includes worksheets for keeping track of mortgage debt and a detailed example of how to use them, to reflect the new rules for 2018 and beyond, and will be offering reprint rights of this guide to fellow tax pros.  I will also be creating a special report to give to my clients with existing mortgages, which will also include the worksheets and example, that will explain the new rules and remind them of their responsibility to keep separate track of acquisition and home equity debt.  Reprint rights to this report will also be available.  I will let you know here when they are available.

So, we should prepare for additional work, and a new opportunity for increased income, for clients with mortgage debt.

Any thoughts or comments?

TAFN