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Home Equity Tax Deduction Eliminated in 2018 | Tax Lawyers News

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The Home Equity Tax Deduction used to be one of the most common deductions used by US taxpayers. The Tax Cuts and Jobs Act of 2017 eliminated this deduction. Let’s take a brief look at the Home Equity Tax Deduction and what its elimination may mean for your US tax return.

Home Equity Tax Deduction: What are Home Equity Loans and Home Equity Lines of Credit?

A Home Equity Loan is a loan which uses the borrower’s equity in his home as a collateral for the loan.

A Home Equity Line of Credit or HELOC is a loan in which a lender agrees to lend a certain amount of funds to the borrower who uses his equity in his home as a collateral. HELOC is different from a conventional home equity loan because the borrower does not receive the entire amount of the credit up front, but uses a line of credit to borrow funds as needed (but not to exceed the credit limit). HELOC is very similar to a credit card, but it is backed-up by the borrower’s real estate.

Home Equity Tax Deduction as of 2017

Prior to the Tax Cuts and Jobs Act of 2017, homeowners who took out home equity loans could deduct from their adjusted gross income (on Schedule A) the interest on a Home Equity Loan or HELOC up to $100,000. This was called the Home Equity Tax Deduction.

Home Equity Tax Deduction Eliminated Starting Tax Year 2018

As a result of the 2017 tax reform (the Tax Cuts and Jobs Act of 2017), the Home Equity Tax Deduction was completely eliminated. In fact, the deduction was eliminated for both, new and existing borrowers (unlike the home mortgage deduction).

Home Equity Tax Deduction Elimination May Impact 2018 Individual Tax Returns

While the precise tax impact of the elimination of the Home Equity Tax Deduction may vary based on your precise tax situation, it can be reasonably supposed that the end of this deduction may result in a larger amount of taxpayers taking standard deduction rather than trying to itemize their deductions. This will be especially true since, in 2018, the standard deduction will double in size.

Prepaid 2018 Real Property Taxes as a Tax Strategy | Tax Lawyers News

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The Tax Cuts and Jobs Act of 2017 radically changed the US tax system with respect to deductible state and local income taxes, including real property taxes. Starting tax year 2018, real estate, person property, income taxes and sales taxes are deductible only up to $10,000. This means that people with high property taxes have a big problem – they have an expense that is no longer deductible. A question arises for tax attorneys – can these taxpayers use prepaid 2018 real property taxes to lower their 2017 tax liability?

This issue of prepaid 2018 real property taxes is the subject of the latest IRS advisory issued on December 27, 2017. Let’s explore this advisory in more detail.

Prepaid 2018 Real Property Taxes That Were Assessed and Paid in 2017

The IRS advised that prepaid 2018 real property taxes may be deductible in 2017 under specific circumstances. In particular, the IRS stated that, in situations where 2018 real property taxes were assessed and paid in 2017, such prepaid 2018 real property taxes may be deductible.

Prepaid 2018 Real Property Taxes That Are Not Yet Assessed But Paid in 2017

On the other hand, if your real property taxes for 2018 were assessed only in 2018, the prepayment in 2017 will not be deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed.

Examples of Deductible and Non-Deductible Prepaid 2018 Real Property Taxes

The IRS provides the following examples of deductible and non-deductible prepaid 2018 real property taxes:

Example 1: Assume County A assesses property tax on July 1, 2017 for the period July 1, 2017 – June 30, 2018. On July 31, 2017, County A sends notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017, and may claim a deduction for this prepayment on the taxpayer’s 2017 return.

Example 2: County B also assesses and bills its residents for property taxes on July 1, 2017, for the period July 1, 2017 – June 30, 2018. County B intends to make the usual assessment in July 2018 for the period July 1, 2018 – June 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until July 1, 2018.