In the 29 January 2018 issue of the Community Update, Worldwide ERC® provided an analysis of the treatment of relocation loans after passage of the Tax Cuts and Jobs Act.
In that article, Worldwide ERC® argued that while the tax reform act repeals the interest deduction on home equity loans up to $100,000, such loans may also be considered part of “acquisition debt” (debt incurred to buy or substantially improve a residence). If a home equity loan is used to substantially improve, build, or acquire a residence, and the loan is secured by the residence, then interest will still be deductible on that loan, provided that total acquisition debt does not exceed $750,000.
The IRS has confirmed these conclusions in advice issued on 21 February 2018.
The IRS provides several examples of instances in which interest on home equity debt may still be deductible when the proceeds of the debt are used to buy, build, or substantially improve a residence that secures the loan.
While this is welcome news for taxpayers in general, it has limited benefit to the mobility industry. While relocation bridge loans generally are considered home equity debt, they are not secured by the new residence to be purchased with the proceeds. Rather, if secured at all, they are commonly secured by the old residence. Consequently, they will not qualify as “acquisition debt” and interest, if any, will not be deductible by the transferee. This problem is discussed in some detail in the Update article linked above.
Interest owed by individuals on home equity loans taken out to buy or improve a residence, and secured by that residence, will still be deductible. If such loans are subsidized by the employer, those subsidies will not need to be grossed up. However, interest on relocation bridge loans will no longer be deductible, and companies will need to consider grossing up to tax protect those transferees.