Home Equity Loan Interest: Still Deductible, Just Depends When

The Tax Cut and Jobs Act of 2017, enacted in December 2017, included limits on the deductibility of interest paid on personal home equity loans and lines of credit, commencing in 2018.

The new limits imposed under the new law is not great news for many Americans. However, the IRS has further clarified the new law. The tax act still allows home equity interest paid to be deducted; however, there are some limitations that did not exist under prior law. Under the new law, loan proceeds must be used towards home improvements, and these home improvements must be on the home that secures the home equity loan. If the proceeds used are for any other reason, such as to pay down credit card debt, then the interest paid is not deductible.

The IRS also clarified the following:

• The home that secured the loan could be either the borrower’s main home or second home.
• Under the 2017 tax act, interest deductions related to total qualified residential loans are limited to $750,000. (Under the prior law, the limitation was $1 million). This means that total deductions for interest payments related to a main home, second home, and home equity loans cannot exceed $750,000. Any interest paid on the loans above that amount are not deductible.

For example:

In March 2018, a homeowner obtained a $400,000 mortgage on a main home. In July, the same homeowner obtains a $350,000 loan on a vacation home. Both loans are considered qualified residence loans, and therefore, the interest paid is deductible. Additionally, if the same homeowner then obtains a home equity loan of $100,000 for renovations of the first home the interest paid on that loan is not deductible, as the total loan balances now exceed $750,000.

If you have any questions regarding home interest deductions, please contact your Marcum tax professional.