April 19th was Tax Freedom Day. Tax Freedom Day® is the day when the U.S., as a whole, has earned enough money to pay its total tax bill for the year. Federal, state, and local taxes get divided by the nation's income. This year we had to work 109 days to pay it. With this significant day behind us, we can focus on being mindful of our taxes and aware of tax law changes that took effect in 2018. As you know, late last year several modifications were made to the tax code: mortgage interest can only be deducted on the first $750,000 of new mortgages, down from $1,000,000; previously unlimited deductions for property, local and state taxes are now capped at $10,000; home equity loan interest deductibility will vary based on the use of proceeds.
Prior to 2018, home owners were entitled to deduct the interest paid on home equity loans or lines of credit, if itemized on their tax return. As of January 1, 2018, any new or existing home equity loans are only deductible if the loan proceeds are actually used for a qualified home improvement. Let’s say for example that Joe and Jill, home owners, had used $100,000 home equity loan to consolidate bills 3 years ago and the loan interest rate was 5%. Prior to 2018 they would have been able to claim $5,000 of interest that could be used to reduce their taxable income and pay lower taxes. This year, they will not be able to claim that interest; so, if they are in the 30% tax bracket, for instance, their tax will increase by $1,500 ($5,000X30%).
EFI for Equity Access, on the other hand, is a tax neutral and interest-free solution for current homeowners, who have decided to take some equity out, for whatever purpose they may have. Let’s say that Joe and Jill own a $1,000,000 home and have one child who is going to go to college soon. They realize that their 529 college saving plan needs a little boost. After careful consideration, as well as consulting with their tax accountant and certified financial planner, they have made the decision to take an EFI for $100,000 (10% of the current value of the home). That amount is non-taxable and can be used for funding a goal, an educational one in this example, or any other goal. From this point of view, EFI for Equity Access is a freeing choice, as it is not subject to the new fiscal restrictions that apply to home equity lines of credit.
We are not giving you a tax opinion, or legal advice; we are showing you that accessing liquidity through debt (HELOC) vs. equity sharing (EFI) will have its costs and its limitations. There is no one size fits all and we don’t believe that EFI for Equity Access will work for everybody, but we do believe it will work for those consumers who have a liquidity need and want to fund a goal that is important to them. As always, equity sharing from our point of view, presents a viable alternative that needs to be carefully studied and understood in comparison with all other forms of home financing, which are primarily debt-driven. Thank you for being with us! See you next week.