It's 2018. Will I Lose My Tax Deduction if I Refi?

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Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343

It's 2018.  Will I Lose My Tax Deduction if I Refi?

 

If you're asking this question, I'm going to go out on a limb and say you're experiencing some anxiety right about now.  But no matter how bad it gets, realize things could always be worse.  You could be the Internal Revenue Service and tasked on a couple weeks' notice with retooling your shop to both comprehend and implement the Tax Cuts and Jobs Act.  So whether you're a homeowner, a CPA, a Californian, an IRS employee or a blue state Democrat, let's wash down a couple of Xanax with a strong martini and focus only on what happens if you attempt to refinance a mortgage that was originated before December 15, 2017.  Will you lose your mortgage interest deduction?  Will you be subject to new itemization limits?  Will you make America great again? 

 

For now, we're going to focus only on one-unit properties, AKA single-family residences (SFRs).  If you are attempting to refinance any conforming or FHA loan, the new tax code does not come into play.  Why?  Because your loan amount cannot, by definition, exceed the 1-unit maximum of $679,650.  And since the allowable limits on mortgage interest deductibility are now at $750K, down from $1MM, you are still below the threshold.

 

But let's instead say you have a loan balance of $1,020,050, for example, and your loan was originated in 2014.  Up to this point, your tax professional (or software) has likely been allowing you to deduct the interest on up to the first $1MM of this debt.  I'm not going to go into the formula or method we'd use to determine the total amount of interest that would be itemized, but get in touch if you'd like to discuss that with me at any point.  Knowing that the deductible max has been reduced from $1MM to $750K, you are concerned that if you refinance one of two things might happen:

 

  1. If I refinance will I lose my mortgage interest deduction altogether?
  2. If I refinance, will my mortgage interest deduction be reduced from $1MM to $750K?

 

Which is correct?  Well, we need more information.  But we know for certain that #1 is not a possible outcome.  Simply by refinancing any loan originated before the new tax code became law does not put you at risk for losing your mortgage interest deduction (MID) in entirety.  Whew.  However, the amount of MID will now depend on how you transact the refinance.

 

Let's go back to our example above.  We'll assume our borrower either wants to take advantage of rates that are still historically excellent, or maybe convert an ARM to a fixed rate loan.  But perhaps more than even rate benefit or peace of mind, what our borrower in question definitely DOES NOT want to do is lose tax benefit needlessly.  Here's the important point.  When refinancing, so long as this borrower does not increase the loan balance ($1,020,050 in our example), he/she will keep an MID limit of $1 million dollars.  It will be grandfathered in at that level.  But caveat qui mutuum accipit --- my interpretation of the new code says that if we even so much as include the closing costs in the new loan balance ("rolling them in"), we could be subject to an MID revision down to $750K.  Simply, the new law says that the loan amount cannot increase.  Over the coming weeks and months we may get more clarity from the IRS, but for now, I think it's a safe assumption that the loan amount should not exceed the payoff amount that our escrow agent will put on the settlement statement.

 

Going forward, cash out refinances, purchase money loans and refinances of loans originated after 12/15/2017 will all be subject to the new limitations for the mortgage interest deduction.  This is a sweeping change, for sure, and navigating it is not quite as simple, say, as tweeting random thoughts at 4am.  If you have questions about a loan you'd like to refinance in California, and which may be subject to provisions of the new tax code, connect with me at the contacts below.

 

Covfefe, 

 

 

Robert J. Spinosa
Vice President of Mortgage Lending

Guaranteed Rate
NMLS: 22343 
Cell/Text: 415-367-5959 Fax: 415-366-1590
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960

Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
 

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate's Human Resources Department.

 

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 - (866) 934-7283

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  1. Kate McQueen, REALTOR® 01/02/2018 02:33 PM
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Rainmaker
111,795
Eva B. Liland with Century 21 Doug Anderson
Century 21 Doug Anderson - Lancaster, CA
Glad to be of Service

Only time will tell what future implications will be for properties in the situation you just described. Thanks for all your knowledge keeping members in the rain informed Rob Spinosa .

Jan 02, 2018 07:23 AM #2
Rainmaker
2,661,913
Kristin Johnston - REALTOR®
RE/MAX Realty Center - Waukesha, WI
Giving Back With Each Home Sold!

Terrific information! I hope your New Years was a blast too!

Jan 02, 2018 07:33 AM #3
Rainmaker
3,508,435
William Feela
WHISPERING PINES REALTY - North Branch, MN
Realtor, Whispering Pines Realty 651-674-5999 No.

Time to get professional help.  It will take some time to get this down

Jan 02, 2018 08:50 AM #4
Rainmaker
2,561,346
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale-Probate & Trust Specialist

Rob,  All of this is why I have a CPA.  There is so much to keep on top of ... and my CPA is my guide.  Great post. 

Jan 02, 2018 01:09 PM #5
Rainmaker
1,853,848
Andrew Mooers | 207.532.6573
MOOERS REALTY - Houlton, ME
Northern Maine Real Estate-Aroostook County Broker

Good to get this information out there in black and white.

Jan 02, 2018 01:27 PM #6
Rainer
176,298
Caroline Gerardo
Eagle Home Mortgage, LENNAR HOMES Home Loans - Newport Beach, CA
C. G. Barbeau the Loan Lady

Here in California we will see mortgages under the $750000 amount until the law is repealed

Jan 02, 2018 01:52 PM #7
Rainmaker
282,460
Kate McQueen, REALTOR®
Realty ONE Group-Lone Star - Cypress, TX
Tailored service for your real estate needs!

Very good post, thanks for making the deductible limits and the impact more coherent.  With the tax law being signed during the holidays I honestly wasn't sure where they settled concerning the mortgage deduction.

Jan 02, 2018 02:03 PM #8
Rainmaker
2,246,614
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

We have to start discussing this...good job

Jan 02, 2018 03:01 PM #9
Rainmaker
3,356,514
Dorie Dillard
Coldwell Banker United Realtors® ~ 512.346.1799 - Austin, TX
Serving Buyers & Sellers in NW Austin Real Estate

Good evening Rob Spinosa,

An excellent post on the complexities of these new tax laws. I depend on my CPA to stay on top of things. I believe in doing what I do best and hire the rest. Will be interesting to see how this plays out. In Texas I don't think we will be impacted as much as the median price point is much lower. I have to admit I've seen some sellers who've been using their home as an ATM machine and that may come to a halt.

Jan 02, 2018 04:07 PM #10
Ambassador
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Fred Griffin
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

  Hi, Rob.

       Excellent post on how the Tax Reform will affect mortgage interest deduction.  I want to give a shout-out to Carol Williams - she may want to consider this post for her Saturday blog post series.

Jan 02, 2018 06:23 PM #11
Rainmaker
2,550,064
Debbie Gartner
The Flooring Girl - White Plains, NY
The Flooring Girl & Blog Stylist -Dynamo Marketers

Great explanation on a complex topic.  In my area, as w/ California, this becomes a much more common question.

Also, there is a big 'to do" over those who prepaid property taxes and inconsistency w/ IRS, NYS, our county and the munipalities.  There was a lot of confusion and super long lines.  I believe several lawsuits were filed already on the inconsistency and chaos created.

And, now, there is a lot of shuffling going on, esp in definitions of businesses.

I really do wish they would make cost of living adjustments.

Jan 02, 2018 06:53 PM #12
Rainmaker
2,543,048
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

I heard today that they might modify some things that people are worried about. That might be a good idea.

Jan 02, 2018 07:51 PM #13
Rainmaker
2,543,048
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Debbie is right about it being a really big thing in California from what I’m hearing. It’s pretty big elsewhere also, though. So this topic hits a lot of good points!

Jan 02, 2018 07:52 PM #14
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Jeff Dowler, CRS
Solutions Real Estate - Carlsbad, CA
The Southern California Relocation Dude - Carlsbad

Hi Rob

Great information in your post, and it makes it even more clear why working with a knowledgeable mortgage is key, along with consulting your tax professional. You don't have one? Get one.

Jeff

Jan 02, 2018 08:26 PM #15
Rainer
432,859
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

I was told by an MLO that the maximum ceiling under the new tax law for mortgage deductions was $10k regardless of the type of residential property, was I misinformed? 

Jan 02, 2018 09:45 PM #16
Ambassador
2,592,188
Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services

Complicated topic, complicated unneccarily, and keeping CPAs and Tax attorneys in business. They happen to be the biggest lobbying group to keep from getting the tax code simplified or even getting rid of the IRS. The more complicated, the better it is for the IRS, the CPAs, judges and tax attorneys while the rest of the population is under their whims. Somehow we have lost our way.. with many people working for the IRS for the first 3 months of each year- all that income to the IRS, and that is not even taking into account the amount of paperwork that needs to get put in order to send to our accountants. 

Until people stop fighting about this deduction versus that deduction... and start saying there shouldn't even be any deductions as there should not be such high taxes in the first place in order to have to even worry about deductions, we will continue to get complicated tax laws and rules. 

Jan 02, 2018 11:44 PM #17
Rainmaker
2,587,891
Scott Godzyk
Godzyk Real Estate Services - Manchester, NH
One of Manchester NH's Leading Agents

I like thd breakdown for mortgages as the mainstream news left many of details out. I think it is omportant for agents to know enough about the law to understand the questions of our clients and refer them to the right CPA who can give them answers.

Jan 03, 2018 05:28 AM #18
Rainmaker
1,444,654
Gary L. Waters, Broker Owner, Waters Realty of Brevard, LLC
Waters Realty of Brevard, LLC - Rockledge, FL
... a small office, delivering big service!

As an agent this is good knowledge for me to use in my own life.  As for customers, it is enough information to know to refer to a qualified expert.  I think, for the majority, the $750K cap will not really be an issue.

Jan 03, 2018 06:28 AM #19
Rainmaker
722,632
Mel Ahrens, MBA, Kelly Right Real Estate
Kelly Right Real Estate - Hood River, OR
Customized Choices for your Real Estate Needs

Really nice summary of a complex topic.  I was not aware of the grandfathering availability to refinance.

Jan 03, 2018 12:00 PM #20
Rainer
398,142
Dörte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear Rob,

So I guess, we should stay tuned for more details. Now for the question, if all of us should convert to corporations?? Time will tell.

Jan 09, 2018 06:48 PM #21
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Rob Spinosa

Vice President of Mortgage Lending, Marin County
Can I Get a Jumbo Loan with 10% Down?
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