The 2017 Tax Cuts and Jobs Act: Family Law Tip #4 – How much money can I take in a cash out refinance?

Thursday, 03 May 2018 20:16 Written by  Elizabeth J. Fineman

Prior to the tax act, taxpayers who required additional cash for a variety of reasons, including buying our their spouse’s interest in the residence,  would regularly refinance the mortgages on their residence for a larger amount.  The benefit was that the mortgage interest on the refinanced mortgage could be deducted up to a $1,000,000 cap.  

The passage of the Tax Cuts and Jobs Act has effected a huge change limiting the mortgage deduction in this scenario, which may have a significant impact on parties going through a divorce.  The new law limits the amount of the mortgage to funds needed to acquire a residence, construct a residence or substantially improve a residence.  So, if you are refinancing for one of these allowable expenses, and stay below the $1,000,000 cap, the interest would still be deductible.   However, in a divorce that is often not the case.

In a divorce, the party retaining the residence will have to refinance the loans related to the residence to remove the other party’s name.  Often, this will be both a mortgage and a home equity line of credit.  Moreover, the party retaining the residence often has to refinance for a larger amount to make a cash payment to the other party to “buy out their interest” in the house.  With the new law, the parties refinancing the marital residence to take cash out to pay off the other spouse will be limited to the principal balance prior to the cash out refinance in terms of the interest that can be deducted.  For example, if the principal mortgage balance is $300,000 and the party retaining the residence is refinancing for $500,000 to pay off the other spouse, they will be limited for purposes of the deduction to the interest on the $300,000.  Interest on the additional $200,000 cannot be deducted.  In addition, there will be no deduction when the mortgage is refinanced to now include the home equity line of credit.  Parties are going to have to give more consideration to the tax consequences and resulting true cost of retaining the residence.

Elizabeth J. Fineman

Elizabeth J. Fineman

Elizabeth Fineman concentrates her practice on domestic relations matters and handles a variety of issues, including divorce, child support, alimony/spousal support, marital taxation, equitable distribution and child custody matters. She has handled many high-income support cases involving an intricate knowledge of both family law and complex financial issues. Additionally, she has handled several appellate court matters representing her clients’ interests in the Superior Court of Pennsylvania.

To view Elizabeth J. Fineman's full profile, click here.

Leave a comment

Blogger Bios

  • Alan Wandalowski Alan Wandalowski
    Alan concentrates his practice in Estate Planning, Estate Administration, Elder Law, Estate…
  • Bill MacMinn Bill MacMinn
    Bill concentrates his practice in the area of litigation, including Commercial Litigation,…
  • Christopher D. Wagner Christopher D. Wagner
    Christopher Wagner is an experienced and results-driven business law attorney with a comprehensive understanding…
  • Elaine T. Yandrisevits Elaine T. Yandrisevits
    As an estate planning attorney, Elaine Yandrisevits is committed to guiding individuals…
  • Elizabeth J. Fineman Elizabeth J. Fineman
    Elizabeth Fineman concentrates her practice on domestic relations matters and handles a…
  • Gabriel Montemuro Gabriel Montemuro
    Gabe’s practice focuses on litigation, including commercial litigation, personal injury, estate and…
  • Jamie M. Jamison Jamie M. Jamison
    Jamie Jamison is a supportive, knowledgeable advocate to clients experiencing the challenges…
  • Jessica A. Pritchard Jessica A. Pritchard
    Jessica A. Pritchard, focuses her practice exclusively in the area of family…
  • Joanne Murray Joanne Murray
    Joanne concentrates her practice in the areas of Business Law, Business Transactions,…
  • John Trainer John Trainer
    John’s concentrates his legal practice in estate planning, estate administration and elder…
  • Mariam Ibrahim Mariam Ibrahim
    Mariam Ibrahim is dedicated to helping clients and their families navigate the…
  • Michael Klimpl Michael Klimpl
    Michael’s practice areas include Real Estate, Municipal Law, Zoning and Land Use, Employment…
  • Michael W. Mills Michael W. Mills
    Mike is devoted to helping businesses build value and improve working capital,…
  • Patricia Collins Patricia Collins
    Patty has been practicing law since 1996 in the areas of Employment…
  • Stephanie M. Shortall Stephanie M. Shortall
    Throughout her career, Stephanie has developed a practice focused on advising closely…
  • Susan Maslow Susan Maslow
    Sue concentrates her practice primarily in general corporate transactional work and finance…
  • Thomas P. Donnelly Thomas P. Donnelly
    Tom’s practice focuses on commercial litigation and transactions. In litigation, Tom represents…