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Home equity tax deduction loss complicates a popular way to pay for college

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Homeowners are still trying to wrap their heads — and tax plans — around the many Tax Cuts and Jobs Act (TCJA) changes to the Internal Revenue Code that are related to personal real estate.

There's the new limit on federal deductions for mortgage interest on future home loans, the cap on real estate taxes on your primary residence and the elimination of the write-off for interest paid on home equity loans.

When the new tax law took effect on Jan. 1, the deduction on home equity lines of credit (HELOCs) or home equity loans became a thing of the past.

The House bill had called for the deduction to remain as long as the borrowed money is specifically used to substantially improve the residence that's used as collateral. But the final conference agreement between the House and Senate says: 

Additionally, the conference agreement suspends the deduction for interest on home equity indebtedness. Thus, for taxable years beginning after December 31, 2017, a taxpayer may not claim a deduction for interest on home equity indebtedness.  

So if you spend the home equity money to, for example, pay for a month-long European vacation or add a new game room to your house or buy electronics to fill up that new addition, the interest is no longer deductible.

Your last shot to fully claim this expense, at least until the individual provisions of TCJA expire at the end of 2025, is on your 2017 Form 1040 due by April 17.

Home and higher education: For a lot of families, home schooling has a totally different meaning. These folks use their home's value to come up with money to pay for their children's college costs.

Laudable as the goal might be, the new tax law doesn't care. As Congress decided in December, the interest on home equity debt, even when used for generally perceived good causes like this, is no longer deductible.

That's what is known in the tax world as an unintended consequence. And it's one that will affect a lot of families struggling to get or keep their kids in college.

As the cost of college continues to rise, more and more families in recent years have accessed home equity to pay for higher education.

In fact, writes Ron Lieber in today's New York Times Your Money column, "Many colleges know this and seem to count on it." The more expensive private schools, he notes, even ask about home equity during the financial aid process and factor it into what they ask applicants to pay.

Lieber's examination of whether now-nondeductible home equity is a smart way to pay for college gets this week's Saturday Shout Out.

Why to avoid equity debt: I won't spoil Lieber's findings, but do want to point out a few things.

First, economic times are changing. The low interest rates for the last few years for variable HELOCs and fixed home equity loans has been a good deal. However, recent Federal Reserve actions and discussions about future moves mean you'll soon, if you aren't already, pay more for your residential borrowing.

Second, some in the real estate industry worry that the TCJA changes will mean that the value of homes will fall fast and hard. Those folks may be a bit alarmist, but property is a volatile sector. If the loss of or limits on tax deductions do cause fewer people to buy, it could be problematic. And if that means home prices do drop, you could find yourself underwater on your house-related loans.

Third, we're talking about your house. Yes, you want your child to have a good education, but is it worth losing your home, perhaps the house in which your college-bound child grew up and spent years studying enough to get into that school?

Run your personal tax numbers: I'm not a fan of home equity loans. The hubby and I had a HELOC once, but it was part of the package when we refinanced our Florida mortgage to get a lower main home loan rate.

We never used it. In fact, I shredded the equity line checks as soon as they arrived.

Of course, everyone's personal, financial and tax situation is different. If you think borrowing against your home is the only or best way to pay for other needs, then that's your decision.

But think about the issues I listed. Check out Lieber's piece.

And do the math, which now subtracts any tax savings you previously received.

You also might find these items of interest:

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