These brief tips explain that home equity loan interest may still be deductible post–Tax Cuts and Jobs Act (TCJA), detail two changes the TCJA made to business losses, and discuss whether a qualified personal residence trust is still relevant today.
Yes, home equity loan interest may still be deductible
The Tax Cuts and Jobs Act (TCJA) imposes new limits on the destructibility of home mortgage interest, but, contrary to popular belief, interest on home equity loans (including home equity lines of credit and “second mortgages”) is still deductible in many cases. The act suspends the deduction for home equity interest from 2018 through 2025, unless the loan is used to buy, build or substantially improve your main home or a qualifying second home.
Under prior law, you could deduct interest on up to $1 million in acquisition debt — that is, mortgage debt used to buy, build or substantially improve a first or second residence — plus up to $100,000 in home equity debt, defined as mortgage debt used for any other purpose, such as buying a boat or paying off credit cards. The TCJA lowers the acquisition debt limit to $750,000 (except for mortgages that predate the act) and eliminates the deduction for home equity interest until 2026.
You can still deduct interest on a loan characterized as a home equity loan, however, provided it meets the definition of “acquisition debt.” So, for example, if you use a home equity loan to build an addition to your home, you can deduct the interest — subject to the $750,000 limit on combined acquisition debt on your first and second residences. Interest on home equity loans used for other purposes is not currently deductible.
Tax reform’s impact on business losses
The Tax Cuts and Jobs Act (TCJA) made two significant changes that affect the deductibility of business losses. Previously, businesses could deduct net operating losses (NOLs) in full against the current year’s income, with the excess carried back two years and carried forward up to 20 years. Beginning this year, the carry back period is eliminated and NOLs may be used only to offset up to 80% of current-year income. NOLs may now be carried forward indefinitely, however.
The TCJA also limits business losses for non corporate taxpayers, including partners and S corporation shareholders. Under prior law, taxpayers could fully deduct losses so long as they had sufficient basis in the business and met certain other requirements. Under the TCJA, deductions for net business losses passed through to individuals are limited to $250,000 ($500,000 for joint filers). Excess losses are included in the taxpayer’s NOLs and carried forward to subsequent years.
Is it time to revisit your QPRT?
If you transferred your home to a qualified personal residence trust (QPRT) years ago, the estate tax savings you envisioned may not be relevant today. If estate taxes are no longer a concern, talk to your tax advisor about unwinding the QPRT. One possible option is to continue living in the home rent-free after the trust term. This would pull the home back into your estate, entitling it to a stepped-up basis and relieving your heirs from capital gains taxes on the home’s appreciation.