Can I Still Deduct Interest on Home Equity Loans under the TCJA?
posted Oct 17, 2018 by Harold Shapiro, CPA in the Global Tax Blog
Did the Tax Cuts and Jobs Act impact home equity loan deductions? Well, despite newly enacted restrictions on home mortgages, taxpayers can in many cases still deduct interest on a home equity loan, home equity line of credit or second mortgage, no matter how the loan is labelled.
More on home equity loans
Home equity loans allow you to borrow against your home’s value. Through a home equity loan, you can secure funds for large expenses like home purchases, home improvements, higher education, starting a business, and more. Home equity loans typically have a lower interest rate than unsecured loans (personal loans, credit cards, etc.)
Also, there are potential tax benefits. You could be eligible to deduct some of the interest you pay on a home equity loan, specifically if you use the funds to buy your home, or for substantial improvements to your property.
New rules under the TCJA
Under the new law, taxpayers can still deduct interest paid on home equity loans and lines of credit as long as they are used to buy, build or significantly improve the home that secures the loan.
Hence, interest on a home equity loan that is used to build an addition to an existing home is generally deductible. However, interest on the same loan used to pay for personal expenses (like credit card debts, for example) is not deductible.
Keeping with prior law, the loan has to be secured by the taxpayer’s main home or second qualified residence and not exceed the cost of the home.
Let’s talk about the numbers.
Prior to the TCJA, taxpayers could deduct interest on up to $1 million in home loans. The new law sets a new, lower dollar limit. Beginning in 2018, taxpayers are only allowed to deduct interest on up to $750,000 in home loans, again only on loans used to buy, build or improve a home.
Let’s say that in January 2018, someone took out a $500,000 mortgage to buy an $800,000 home. In February 2018 that same taxpayer took out a $250,000 home equity loan for an addition on the home. Since the taxpayer used the loan exclusively for buying and renovating the home, and it did not exceed $750,000, all interest paid on the loans is deductible.
Again, if the home equity loan proceeds had been used for personal expenses, the interest on the home equity loan would not be deductible. Also if the amount the original loan and the home equity loan exceeded $750,000, the portion of the interest on the loan in excess of $750,000 would not be deductible.
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