Home Equity Loan Interest Still Deductible Under New Law

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The IRS has advised taxpayers that home equity loan interest is still deductible, despite newly-enacted restrictions on home mortgages imposed by the Tax Cuts and Jobs Act ( P.L. 115-97). Under Code Sec. 163(h)(3)(F), which was added by the 2017 Tax Cuts Act, the deduction for interest paid on home equity loans and lines of credit is suspended from 2018 through 2025 unless they are used to buy, build, or substantially improve the home securing the loan (i.e., “acquisition debt”).

For example, interest on a home equity loan used to build an addition to an existing home would be deductible. On the other hand, interest on a home equity loan used to pay credit card debts is not typically deductible. As was the case prior to the amendment, to be deductible the loan must be secured by the taxpayer’s home main home or second home, must not exceed the cost of the home, and must meet other requirements.

New Dollar Limit

Under the new law, there is a lower dollar limit on mortgages that qualify for the home mortgage interest deduction. Beginning in 2018 and lasting through 2025, taxpayers may only deduct interest on $750,000 of qualified residence loans; this is down from the prior $1 million limit. For a married taxpayer filing a separate return, the limit is $375,000 (down from the prior $500,000 limit). These limits apply to the combined amount used to buy, build, or substantially improve the taxpayer’s main home and second home.

Examples

The guidance provides several illustrative examples:

Example 1: In January 2018, Thomas takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, he takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by Thomas’s 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, Thomas can deduct all of the interest paid on the loans. However, Thomas could not deduct the interest on the home equity loan if he used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards.

Example 2: In January 2018, Thelma takes out a $500,000 mortgage to purchase a main home, which secures the loan. In February 2018, she takes out a $250,000 loan to purchase a vacation home, which secures the loan. Because the total amount of both mortgages does not exceed $750,000, Thelma can deduct all of the interest paid on both mortgages. However, if she took out a $250,000 home equity loan on the main home to purchase the vacation home, then Thelma could not deduct the interest on the home equity loan.

Example 3: In January 2018, Terri takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, she 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, Terri cannot deduct all of the interest paid on the mortgages, but can deduct a percentage of the total interest paid.