Did the New Tax Bill Shrink Your Piggy Bank?

Karim Rahemtulla By Karim Rahemtulla
Options Strategist

Market Trends

There’s a lot to like about the new tax bill – and a lot not to like.

You may be surprised by this, but one of the provisions eliminated the deductibility of interest on home equity lines of credit (HELOCs) for nonresidence-related debt. It’s one of the best things about the bill.

According to the tax bill – and you should always check with an accountant about your specific situation – interest on nonhome-related indebtedness is no longer deductible.

That means you can deduct interest that was paid for things like home improvement up to $100,000. But that new car, those high interest rate credit cards, the vacation in Europe… none of the interest on those things can be deducted if you paid for them with a HELOC.

This is the way it should be. But if you listen to the countless radio and TV ads, unscrupulous lenders – especially local mortgage brokers – are still flogging second mortgages and HELOCs as if nothing has changed. I heard one just yesterday talking about how to use it for nonhome improvement reasons, without even a slight mention of the tax law changes.

I am still steaming about how many people got away with not paying their debts from the Great Recession. Call me old-fashioned, but if I rack up debt, I am going to pay it back. For all those who walked away from their debts, there were many who buckled down and kept chipping away.

Sure, there are a million reasons and excuses for why it was different last time. The banks acted fraudulently, the realtor said prices would go up, the appraisal was fixed, you lost your job… the list is endless.

None of those reasons are going to pass the smell test with me, however. That new Hummer you bought (but shouldn’t have) with the appreciation of your home’s value? How about the Jet Ski that you couldn’t afford but just wanted because your home was worth more? Or that trip to Machu Picchu? Those are all wants – not needs – and speak more to poor decision making.

Yes, the banks were crooked. Yes, the appraisers were in on it. But that does not excuse personal responsibility. That is what I am talking about.

The new law still allows you to deduct up to $100,000 in interest as it relates to home improvement. But it takes away the “ATM mentality” that many fell victim to as their homes appreciated.

Many people lost their homes during the property price crash because they bought at the highs. But many also lost their homes because they piled on the home equity debt. It was easily available and akin to waving candy in front of a baby. It was freely consumed.

I am seeing it in my neighborhood right now. It’s like a bad dream about to replay. I feel like I must be living close to a BMW assembly line! Restaurants are packed. It’s near impossible to get any type of repairman to show up at short notice.

Sure, the strength of eight years of economic recovery has a lot to do with it. But without wage growth, there’s a lot of change coming back into the market from home equity.

Last year, I could not walk past the front door of my bank without being accosted by a rep looking to sell me on a HELOC.

But because of this new provision, I am hopeful it will not be as severe the next time around. Look, a HELOC that is used to pay off high-interest personal debt may still be a good thing even if the interest is not deductible (neither is the debt on consumer loans).

But your home is not a piggy bank. If you use it like an ATM or lending institution, it can go down in value. And the less encumbered it is, the better off you will be in the future.

I am not a fan of the government making “adult” decisions like this one for us. Heck, it may have done it for reasons I’m not even aware of. But I’m glad the provision passed. It’s one of the few that won’t add to the national and personal indebtedness that still has no end in sight.

Good investing,

Karim