Here’s a question I received at USTaxAid. It relates to just one of the 95 strategies that I talk about in Taxmageddon 2018. Do you have your copy yet? Don’t wait! Pay $20 now and invest some time reading and implementing the strategies, and you’ll avoid the huge tax hit that is about to catch unsuspecting taxpayers. Go to www.Taxmageddon2018.com to invest in your copy.
Here’s the question:
I own a bare lot as an investment property; It was part of an inventory of rental properties that I have sold off within the last few years. Currently it is my only investment property. Due to unique circumstances I have not been able to sell it, even at a greatly reduced price.
To fund it when a balloon mortgage came due during the real estate crisis, I used a HELOC on my personal residence. The money was designated 100% to the financial needs of the property over many years. Now, under the Tax Cuts and Jobs Act, I am not sure what to do. It was refinanced with another bank in October 2017. What is the current application of this law and what options do i have?
In the past, you had the choice of taking the HELOC interest deduction as a mortgage expense on your Schedule A or the strategy I’m about to talk about. I know most people used the Schedule A strategy (itemized deductions) just because it was easy.
Under the Trump Tax Plan (Tax Cuts and Jobs Act), the HELOC interest looked like it was no longer deductible. The IRS cleared the air on that and said “YES” it would still be deductible, but only if your total indebtedness is under the qualified residence debt. For 2018 property (and beyond) the total loan cannot be more than $750,000. The loan actually can be comprised of three parts:
- Your primary residence loan,
- Your HELOC (provided it does not exceed $100,000), and
- The loan for your second residence.
The total cannot exceed the total deductible loan amount.
If you’re under the mortgage loan limitation, you can continue to deduct as you have.
However, if it looks like you can’t take that deduction, it’s best to look for another place to take the deduction. That’s provided you can do that legally. In your case, the interest could be considered interest on the investment property. If the property is not yet in service (rented) and is just being held, it’s not immediately deductible. However, it will increase your basis so that later when you do put it in service, you will have more basis on which you base your depreciation. Or, you will have more basis to reduce your taxable gain when you sell. Either way, it’s an eventual win.
On the other hand, if you have non-deductible HELOC loan with no business or investment purpose, it’s use it or lose it. You can’t use it. So you lose it.
The strategy I talk about in “Taxmageddon 2018” is to be able to prove that any HELOC draws were used for a business or real estate. In that case, you’ll get the deduction.
Once you have your copy of “Taxmageddon 2018”, turn to Chapter 16 for information on how to register it to get free tax bonuses and critical updates on the Trump Tax Plan.