Mortgage Interest Round Two

Q.  The new tax law eliminates the deduction of interest for home equity loans, but  I can’t seem to get an answer on whether the interest on our “Home Equity First Mortgage” from our federal credit union will be deductible. We refinanced our existing FHA first mortgage last month based on the equity in our home, and the mortgage docs shows it as a conventional fixed rate loan for 10 years.  I’d hate to have to do a whole new refinance if we don’t need to for the mortgage deduction…

A.  Chances are pretty good that your refinance is deductible, but that depends on how the proceeds of the loans were used.

I will assume all of the proceeds from the original FHA loan were used to acquire the  residence. 

When refinancing, proceeds can be used for various purposes, such as:

1) pay off the old loan,

2) to make improvements to the residence, and

3) other purposes, like college or wedding costs.

Of these, proceeds used for 1 .and 2. qualify as acquisition debt, so interest on this portion of the refinance would still be deductible.

Proceeds used for other purposes (3.)  is not acquisition debt;  the related interest would be deductible as home equity interest under 2017 law, but is not deductible under 2018 law.

Under 2017 law, alimony and separate maintenance payments were deductible by the payor spouse and includible in income by the recipient spouse.

Child support payments were not treated as alimony.  

Under the new law, alimony and maintenance payments are not deductible by the payor, and are not considered taxable income to the recipient. This will likely result in alimony being taxed to the spouse with the higher tax rate.

Wait, don't panic! This provision applies to divorce/separation agreements executed after December 31, 2018. If you untied the knot before that date, you can stay under the old rule, or, if you like the new law better, you can modify your prior agreement.

 What's to complain about?

They doubled the child tax credit for "the little guy", and made it easier for rich guys to qualify too.

If you have children under the age of 17, you are probably familiar with the child tax credit. For the most part, the new law improves and expands the credit, and dramatically raises the AGI limits at which the credit begins to phase-out. Below is a brief summary of the old law, and analysis of how the child credit changes under the new law.

The short answer to your question: most people will not see a change in their mortgage interest deduction.  Your deduction for interest on home equity loans, however, is toast*.

The new tax law makes some changes to the deductability of home mortgage interest, but the changes apply within the framework of prior law. And, the prior law is automatically reinstated 1/1/26.  So, to understand the changes, we need to review prior law.

It's no secret, I do not like Bitcoin.  I see it as an incredibly risky investment, a fiscal train wreck that is inevitable.

Nonetheless, some people are sitting on impressive gains, and looking for ways to minimize the tax bite.  Some are looking to §1031, which deals with like-kind exchanges.   The theory is, if you exchange your grossly appreciated Bitcoin for a similar property, like Etherium or Litecoin, you could defer recognizing taxable gain until you dispose of the replacement property.

I don't think this theory will work, because I don't think cryptocurrency fits into §1031. A number of experts agree with me.  The IRS has not issued any guidance on this issue. However, if you are inclined to try this ploy (penalties and interest may apply),  you only have a few days to make it happen. The pending tax reform bill makes it clear that §1031 applies to real estate transactions, only.

How's this for a nightmare scenario?  You race to exchange one crypto for another, before Tax Reform takes effect.  The IRS later pronounces that §1031 does NOT apply, so it turns out you have a massive taxable gain for 2017.  But wait, early in 2018, all cryptos crash, giving you an equally massive capital loss, of which you can deduct only $3,000 per year for the next 100 years.  But hey, if you were not a gambler you wouldn't own this stuff in the first place!