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Home Equity Loan Interest Deduction Clarified by IRS

Home Equity Loan Interest

Responding to many questions received in response to newly-enacted restrictions on home mortgages, the IRS has confirmed that taxpayers can continue to deduct home equity loan interest and interest on a home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled.

The Tax Cuts and Jobs Act of 2017 suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan 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.

For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home equity loan interest deduction. Beginning in 2018, taxpayers may only deduct interest on up to $750,000 of qualified residence loans ($375,000 for a married taxpayer filing a separate return). These are down from the prior limits of $1 million ($500,000 for a married taxpayer filing a separate return).  The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

Click here to see examples offered by the IRS. 

Overwhelmed by all of the changes resulting from tax reform and not sure how to plan for next year? We are here to help, and happy to talk to you about your specific circumstances. Call us at (502) 426-9660 or email us.

 

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