The IRS last week clarified that interest paid on home equity loans is still deductible in most cases following the passage of federal tax reform.
There’s been a lot of confusion surrounding the home equity line of credit – or HELOC – section of the Tax Cuts and Jobs Act. Because of some confusing language in the act, many believed the interest on the loans was no longer deductible.
The IRS last week clarified that interest paid on the loans remain deductible as long as they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. The interest is not deductible if the loans are used pay personal living expenses, the IRS said.
Under prior federal tax law, if you itemize your deductions, you could deduct qualifying mortgage interest for purchases of a home up to $1,000,000 plus an additional $100,000 for home equity loans. The Tax Cuts and Jobs Act sets a new maximum of $750,000 for interest deductions of qualified home loans taken out after December 15, 2017.
READ MORE: Individual Taxpayers Get Lower Rates, Other Big Changes Under New Tax Law
The requirement remains that home equity loans must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements, the IRS said.
The IRS provided a few examples of when the interest paid on a home equity loan would and wouldn’t be deductible.
Example 1
- In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000.
- In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home.
- Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible.
- However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Example 2
- In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home.
- In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible.
- However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example 3
- In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home.
- In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home.
- Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible.
Home equity loan interest is one of many tax changes for individuals under the Tax Cuts and Jobs Act. Read about some of the others here:
Individual Taxpayers Get Lower Rates, Other Big Changes Under New Tax Law
The New Tax Law & Your Estate Plan: Six Changes to Know
2018 Kiddie Tax: New Rules Means New Strategies
Looking for guidance on how to take best advantage of the new tax laws? Contact us at info@concannonmiller.com for a personal assessment.
