By Clode Moradi, MSPFP, CFP®
Deductible Home Mortgage Interest
It’s no wonder that one of the most talked about changes, as a result of “The Tax Cuts and Jobs Act of 2017”, is the limits on deductible interest for secured home loans and home equity debt used to purchase or fund qualifying property. You can still deduct interest on up to $750,000 of qualifying mortgage debt, however; with the exceptional growth in real estate values in areas such as Glendale California and its surrounding areas, the $750,000 limit will cause some newer home owners to potentially pay some mortgage interest that is not deductible.
I recently spoke to Martin & Mike properties and Silvia Hairapetian, who are some very well know real estate professionals in Glendale, CA. According to them, the current median home price in all of Glendale CA is north of $750,000. That blew me away, so I did some research and found out that, according to Zillow, the current median price for homes listed in Glendale is $895,000 with the median home values coming in at $845,300 (5.7% increase since last year). Burbank CA has a median listing price not too far behind. Burbank’s current median listing prices show up as $834,000 with median value at $817,000 (6.6% increase since last year).
It has become common place for a three-bedroom house in the better parts of Glendale California to sell for more than $1,000,000. What this indicates is that most people, purchasing in these areas and price ranges, may not be able to enjoy the past benefit of writing off their entire home interest payment. Let’s take a look at a very simplified example:
If you were to purchase a three-bedroom (two bath) home in a prestigious part of Glendale California for 1.2 million dollars and carry one million in debt via a secured mortgage, you would be paying non-deductible interest on $250,000 of that loan under the new rules. If your loan has an interest rate of 5%, that would equate to approximately $12,416 (in the first year) in non-deductible home mortgage interest. Under the old rules, the interest on the entire $1,000,000 secured mortgage would be deductible. Note: Keep in mind, the portion of your payment that is deductible interest decreases (principal portion of payment increases), as your overall loan balance decreases.
Married vs Single
Worth noting, the $750,000 limit is a combined total if you are married. If you are single, it is still $750,000. What this means is that two single people can purchase one house together with a larger mortgage and they each can write off the interest on their own $750,000 limit. For those of you wondering, married filing separately will not allow each spouse to use the $750,000 limit separately. You will still have a combined limit of $750,000 and how you deduct it is dependent on how the accounts used to pay the mortgage were titled and some other factors.
You can still deduct interest on home equity loans and home equity lines of credit (subject to the new overall secured loan limitations of $750,000) via home equity debt, as long as it is used for something that is considered qualified by the IRS. The IRS states that the funds need to be used to buy, build or improve a primary or second home. Prior to the new rules some of these types of home equity debt (subject to the old limitations) were generally deductible with less stringent rules that allowed up to $100,000 of the funds (in addition to the $1,000,000 cap on acquisition, building, improvement debt) to be used for things such as paying off bad debt. Now, the rules are less broad, the overall limit is dropped down to $750,000, and the $100,000 allowance is gone. As you can see this can have varying effects on homeowners, depending on their unique situations.
Refinancing and Cash-Outs:
Here’s my other article on this topic:
This new change is only effective for mortgages that were taken on after December 2017. If you have a mortgage that existed on or before December 15, 2017, you are under the old rules that still allow you to deduct interest on up to $1,000,000 of qualifying mortgage debt. Why is this important? Because if you were to sell your house and take on a new mortgage on a different home, your new loan will be subject to the decreased limits. Also, if you are trying to do a cash out refinance you have to be very careful as the rules get tricky and the cash out may not be deductible. You have to be careful and calculate the numbers before you make any moves.
Link to Article Regarding Refinancing and Home Equity Debt
What Qualifies as a Home*?
The deduction is for secured debt used to purchase what is defined as a home. I know this may sound funny, but the IRS defines what constitutes a home. In general, the IRS views a home as a property that has amenities such as a toilet and accommodations for cooking and sleeping*. Also, you may be surprised to find that a boat or a mobile home may qualify if it legitimately fits the definitions set by the IRS.
This is a general description, so please don’t go out and buy something without making sure it qualifies with the IRS as a home that fits their definition under the law*. A vacation home/ second home that is rented out part of the year is a good example of this. There are different rules when it comes to second homes and limits on how many days out of the year they can be rented out and still qualify as a second home. I won’t get into it in this article, for the sake of digestibility. Maybe a future article.
Lastly, the $750,000 limit is not for each home. It is a cumulative limit, which means that it’s a total and you cannot take it for each separate property. For example, if you have a home in Glendale and another home in Burbank, you can combine the mortgages on both homes as long as you don’t take a deduction for interest payed in excess of the $750,000 mortgage limit as a total.
Example: You have a mortgage for $525,000 on your Glendale home and a $400,000 mortgage on your Burbank home. Both mortgages were taken out after December 2017. You can combine both loans for a total of $925,000. Of this amount you can deduct the interest on $750,000. The remaining $225,000 is not deductible.
Not Applicable to Investment Properties:
These rules don’t apply to properties that qualify as investment properties. Investment properties have their own rules that I can discuss it in a separate article.
If you have any questions or would like to come in for a detailed consult on business tax planning. Please call to make an appointment. We have already started planning for the 2019 tax year.
Clode Moradi, MSPFP, CFP®
Clode is an independent Certified Financial Planner™ and has a Post-CFP® Masters Degree in Advanced Personal Financial Planning, from Kansas State University, one of the most prominent financial planning universities in the nation. He graduated at the top of his class with a 4.0 GPA and was awarded a nomination and acceptance into the honorary society of Phi Kappa Phi to represent the importance of higher education in the Financial Planning industry.
Clode specializes in taxation, retirement, and investment planning as they relate to personal goals and quality of life. He also holds a Graduate Level Certification in Financial Therapy, and has written extensive research articles on financial topics such as goal based portfolio construction, how to define “financial success”, money psychology and its manifested human behaviors, and various other topics related to finance, taxation, and human behavior as they relate to one’s quality of life. Clode also has a Bachelor’s Degree in Personal Financial Planning, where he graduated Summa Cum Laude from Franklin University of Ohio. He is an active member of the Financial Planning Association and Financial Therapy Association.
Clode is the founder of Brilliant Financial Strategies, LLC. He started in the financial industry more than 20 years ago and created BFS as a platform to offer financial planning at a much deeper level. Clode feels that Financial Planning needs to break out and surpass the status quo. “Our job is to help clients make use of their financial potential to build a meaningful life”.
He enjoys spending quality time with his wonderful family. Clode’s hobbies include saltwater fishing and Brazilian Jiu-Jitsu. Clode is the creator of a group called Kool Kids Fish that introduces kids and their parents to the hobby of fishing, as a means of spending quality time together. Clode also coaches a kids Jiu-Jitsu Competition class at Gracie Barra La Canada-Flintridge, where he works with kids and teens that compete in Jiu-Jitsu tournaments nationally. One of his most valued personal accomplishments is receiving his brown belt in Brazilian Jiu-Jitsu from ADCC world champion Orlando Sanchez of Gracie Barra.
Clode’s approach to life, money, and financial planning is to create quality of life through balance and honest self-reflection. He believes that abundance can only have value when there is balance in one’s household, family, and internal being. He brings this approach to all aspects of life.
*The definition of what constitutes a home is general and for basic information only. As always, check with your own Certified Financial Planner, accountant, attorney, or tax professional before you make any decisions.
This article is for reference and informational purposes only and does not provide tax, legal, or accounting advice. It is for guidance only and not a substitute for the user seeking personalized financial planning and professional advice. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. These rules are complicated. The IRS has exclusions, restrictions, and qualifications. If you are considering any financial decision, please hire your own professional and take the necessary steps to make sure you are aware of all the implications.
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