“Taxpayers can claim an itemized [federal] deduction for the interest on up to $750,000 of acquisition debt,” said Martin Abo, CPA at Abo and Company in Mount Laurel, N.J. “‘Acquisition debt’ is mortgage debt the proceeds of which are incurred in acquiring, constructing or substantially improving any qualified residence. A plain old loan will just not do.”
“Substantial” improvements can also be, right now, a matter of interpretation of a clients’ facts and circumstances, “I don’t think there’s a specific dollar amount” fixed by regulators, Conover said. “In my mind, remodeling a kitchen or bathroom is ‘substantial.’ Painting and things like that, probably not.”
Added Herron, “Clients will need to be more deliberate if they plan to leverage real estate to finance other activities. As more guidance is issued, areas of opportunity may emerge.”
These interest deductions are continuously developing with ongoing technical corrections from the IRS. Still unclear to Conover: Which loan-size threshold – $750,000 or $1 million – applies if the client took out a secured home-equity line of credit prior to last December and has other acquisition debt but finally decides today to use the money for an addition to the home?
Depending on the use of the funds, other types of loans still provide a tax deduction, such as expenses related to investment interest (distinct from deduction for investment management fees, also nixed under tax reform). “This would include margin loans or other loans where the proceeds were taken to purchase investments that generate taxable income,” Fosselman said. “Another deductible loan would be a business loan for a self-employed individual.”
There are other options for HNW clients: examine economic factors and the HNW client’s entire tax situation. “With rising interest rates, the cost of carrying a home-equity loan increases,” Fosselman said. “With the new expanded standard deduction and the limitation on state/local income tax and property tax deductions, HNW clients … may take the standard deduction.”