The jury’s still out on how tax reform could affect reverse mortgage borrowers — and the prevailing consensus could simply be that each homeowner’s mileage may vary based on his or her specific circumstances.
But for an even deeper dive into the implications of the 2017 Tax Cuts and Jobs Act (TCJA), check out these two resources from prominent retirement bloggers.
Over at Tools for Retirement Planning, writer Tom Davison highlights some of the key changes that could affect those Home Equity Conversion Mortgages — particularly the disappearance of deductions for home equity interest.
Still, the end of the deduction isn’t quite so clear-cut, as Davison points out: Homeowners who take advantage of the HECM for Purchase program can still deduct their interest because that counts as “acquisition debt.” Those who take out HECMs agains their existing homes for cash flow in retirement, meanwhile, can no longer claim those deductions.
“The determination of ‘home equity indebtedness’ vs. ‘acquisition indebtedness’ is based on how the mortgage proceeds are used,” writes blogger Michael Kitces in his own exhaustive breakdown of the TCJA.
Kitces notes that the deductible “acquisition debt” also applies if the mortgage is used to build or “substantially improve” one’s primary residence, and that only the first $750,000 of debt principal can be written off.
“A HELOC that is used to build an expansion on a house is still treated as acquisition indebtedness (as it was used for a substantial improvement), while a cash-out refinance of a traditional 30-year mortgage used to repay credit cards will be ‘home equity indebtedness’ for the cash-out portion,” Kitces wrote.
Furthermore, the new rules only apply to loans taken out after last December 15, Kitces emphasizes, with homeowners still able to deduct interest on the first $1 million of debt principal for all mortgages originated prior to that date.
Written by Alex Spanko