HELOC secured by CA primary residence used to purchase a new primary non-CA residence

[augenbraunj]

Hi experts,

I took out a $300,000 HELOC on my primary residence in California to help purchase my new primary residence in Nevada.  This is not deductible on federal because it was not used to purchase or improve the same home that was collateral for that money.

I feel like the interest on this loan is probably deductible in CA, but I can't find any verification.  I'm pretty sure that $100K of this loan at least is deductible in CA because from what I'm reading $100K can be used on anything.

Just to make things extra confusing:

1.  $18,977 of the $300K was used to improve the primary residence in CA (that portion is deductible on both federal and CA), the remaining $281K was used for the purchase of the new primary residence. 

2.  The $300K HELOC put me over the $750K federal limit for home loans but not over the CA limit of $1M.

3.  I moved out of CA in May 2022 (to the new primary residence) but the old residence didn't sell until Nov 2022 at which time I payed off the HELOC;  So I paid interest on the HELOC for the old CA primary residence while I wasn't a CA resident any more.

All of this is for Tax year 2022.

My questions:

1.  Can I deduct the interest from the $281K portion of the HELOC that I wasn't able to on federal in the state of CA, or am I limited to deducting just $100K of it (or for some reason can I deduct none of it????)

2.  Can I deduct the interest from when I was no longer living in CA?

3.  Could someone point me to an FTB publication that gives the law on this?  I could only find consumer-facing explanations of the simple cases, not the official instructions, operating law, or published official rules.

I'll give good karma and a thousand thanks to anyone who can answer my ultra-confusing question!

[Bsch4477]

Line 8 – Home Mortgage Interest

Federal law limited the mortgage interest deduction acquisition debt maximum from $1,000,000 ($500,000 for married filing separately) to $750,000 ($375,000 for married filing separately). California does not conform. If your deduction was limited under federal law, enter an adjustment on line 8, column C for the amount over the federal limit.

Federal law suspended the deduction on up to $100,000 ($50,000 for married filing separately) for interest on home equity indebtedness, unless the loan is used to buy, build, or substantially improve the taxpayer’s home that secures the loan. California does not conform. If your deduction was limited under the federal law, enter an adjustment on line 8, column C for the amount over the federal limit.

https://www.ftb.ca.gov/forms/2022/2022-540-ca-instructions.html

[augenbraunj]

Thanks for the quick response.  The way I read this it gets me part of the way there!

I think its now clear that for my CA taxes I can make a CA adjustment for the interest from an additional $100K of the HELOC.  What is not clear to me is if I can deduct the rest of the HELOC in CA.

To me it seems the question hinges on the definition of "mortgage interest deduction acquisition debt".  For the purposes of federal this is now only for the home that the loan is secured by.  But before the Tax Cut and Jobs Act of 2017 I think the acquisition debt for a new primary residence would count as "mortgage interest deduction acquisition debt".  Is CA still conforming to the old definition?  The link you gave doesn't really give any clue on that.

- Joe

[augenbraunj]

I'm answering my own question.  A warning - I'm only 90% sure that I'm right here.

My conclusion is that I can take a California deduction only on the interest for an extra $100K of the HELOC.  I found the Federal law definition for Home Equity Indebtedness for pre-2017, and that seems to be the law that CA is still following (this is why I'm only 90% sure - elsewhere CA law points to this section of federal law, but I couldn't find the actual passage in CA law for home mortgage deduction itself).  The law that CA seems to be following is in 26 USC § 163(h)(3).  Here it is:

(3) Qualified residence interest For purposes of this subsection— (A) In general The term “qualified residence interest” means any interest which is paid or accrued during the taxable year on— (i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or (ii) home equity indebtedness with respect to any qualified residence of the taxpayer. For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued. (B) Acquisition indebtedness (i) In general The term “acquisition indebtedness” means any indebtedness which— (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and (II) is secured by such residence. Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. (ii) $1,000,000 limitation The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return). (C) Home equity indebtedness (i) In general The term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed— (I) the fair market value of such qualified residence, reduced by (II) the amount of acquisition indebtedness with respect to such residence. (ii) Limitation The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual).

So the acquisition indebtedness has to be "secured by such residence".  This means that my HELOC that I used to buy a new residence is not acquisition indebtedness and therefore falls under the $100K limitation, not the $1M limitation.