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Tax reform aftermath: New guidance for investors

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      By Andrew H. Friedman, Principal, The Washington Update and Jeffrey B. Bush, The Washington Update

      This is an excerpt from a new white paper from Andrew Friedman and Jeffrey Bush of The Washington Update. The full paper can be downloaded here.

      Washington - Since Congress passed the sweeping Tax Cuts and Jobs Act (the "Act") at the end of 2017, the IRS has issued substantial guidance interpreting portions of the Act. Much of this guidance favors investors by softening limitations and disallowances that the Act imposes.

      Investors should consult with their financial and other professional advisors to determine what actions, if any, make sense in their cases in light of the new guidance.

      This post will examine what investors should know about limiting the effect of the Act's disallowance of the deduction for interest on home equity loans and for state and local taxes (SALT) in excess of $10,000 annually.

      Mortgage interest

      The Act eliminates the deduction for interest paid on home equity lines of credit (HELOCs), including interest paid on existing line of credit borrowings.

      HELOC interest deduction workarounds

      • The Act's prohibition notwithstanding, subsequent IRS guidance provides an exception to the HELOC interest disallowance where the HELOC loan proceeds are used to buy, build, or substantially improve the home that secures the HELOC loan. Thus, for example, interest paid on home equity loan proceeds used to build an addition to the home is deductible, while interest on the same loan used to pay personal living expenses, such as credit card debt or college tuition, is not. (Source: IR-2018-32. Feb. 21, 2018).

      Takeaway: Investors should determine whether they invested HELOC loan proceeds to improve the home that secures the HELOC so that they may deduct the interest paid on their returns for 2018.

      SALT deduction workarounds

      • The SALT deduction limitation applies only to state and local taxes imposed on individuals. State and local taxes imposed on businesses remain fully deductible apart from the $10,000 limitation. For instance, property taxes imposed on business property are deductible from the business's income, even if the investor's non-business state taxes exceed $10,000. The portion of real property tax allocated to a home office is deductible in the same manner (assuming the investor does not use the simplified square footage method to calculate the home office deduction).

      Takeaway: Investors should scrutinize their 2018 state and local tax payments and home office allocation to determine if any taxes are business-related and, thus deductible on their 2018 return.

      The full paper can be downloaded here.