UPDATE: Home Improvement and the Tax Implications for Home Equity
Last week we published an article warning about pending changes in home equity lending due to the recently passed tax legislation. In this article we wrote:
There are two major changes that will potentially affect homeowners. First, mortgage interest deductibility will be limited to primary residences and on loans only up to $750,000 (versus $1,000,000 under the prior law). Note that existing mortgages will be grandfathered. Second, the new law eliminates the tax deductibility for interest paid on home equity loans and home equity lines of credit (HELOCs). Previously, interest paid on home equity products was deductible up to $100,000 and consumers regularly used home equity products to gain a tax advantage when purchasing boats, recreational vehicles, autos, tuition and other needs. There will be no grandfathering for existing home equity holders.
Further review of the legislation seems to indicate that we may have a little hasty in our assessment of the impact on equity lending. The final language indicates that interest-deductible HELOCs and second mortgages WILL be available to homeowners as long as they meet two conditions. First, the proceeds of the loan must be used to make “substantial improvements” to their home, and second, the combined total of their first mortgage balance and their HELOC or second mortgage does not exceed the new $750,000 limit on mortgage amounts qualified for interest deduction – which is a reduction from the previous ceiling of $1.1 million.
Mea culpa on this; we wanted to get information to you as quickly as possible, and events were indeed a little murky. Regardless, our major conclusions continue to hold. The equity product will not be quite as attractive as previously, as homeowners will be unable to use this loan for purposes other than home improvement while still maintaining its tax-deductible status. Still, this revised interpretation is more optimistic than our original interpretation and that is good news for the industry. You’ll want to take a look at your marketing collateral to make sure it reflects the new legislation. And you’ll want to take a look at your equity lending growth goals to make sure they still are realistic. Perhaps most importantly, you’ll want to begin educating your own staff and your clients as to the impact of these changes. One important issue to still be determined is the documentation that will be required to meet the tax deductibility standard for the product. More to come on this.