The new tax bill reduces the maximum amount of mortgage debt for which one can claim itemized interest expense deductions from $1 million (or $500,000 for married filing separate status) to $750,000 (or $375,000 for married filing separate status). This change doesn’t affect home acquisition mortgages taken out under binding contracts in effect before Dec. 16, 2017 as long as the home purchase closes before April 1, 2018.
The final bill also suspends (eliminates) the deduction for interest arising from home equity indebtedness for taxable years beginning after December 31, 2017 and through December 31, 2025.
The bill does not specifically refer to HEL or HELOC though, using “home acquisition indebtedness” and “home equity indebtedness” terminology. Thus, if HELOC was opened to acquire a first or second residence or to refinance debt that originated from such purchase, it is still considered “home acquisition indebtedness”. What about subsequent draws? Again, probably depends on how proceeds are used… What about a temporary repayment with the intention to draw the funds again?
For example, if one has capital used for investments, and it is available between some trades, rather than keeping it in a deposit account during such times and earning next to nothing in interest, it can be used to pay down temporarily HELOC and reduce interest charged - will it no longer be considered “home acquisition indebtedness” if funds are re-drawn a few days later? Weeks? Months? That’s what I wonder…
Obviously the portion of HELOC debt that is considered “home acquisition indebtedness” cannot exceed the original mortgage amount that was refinanced (if that’s how this debt originated), and also cannot exceed the limits mentioned in the first paragraph above. Does it have to decrease over time though? I don’t see why… The principal balance of interest-only mortgage does not decrease, so why would HELOC be different? If min payment is defined as a % of current balance, nothing is stopping borrowers from drawing an equal amount from the HELOC itself prior to making each payment, thus preserving the entire balance as “home acquisition” debt…
I am not an accountant and interested in what smarter people have to say on this.
Of course, I realize that with the newly doubled standard deduction, this whole discussion is purely theoretical for vast majority of people.