New Limits on the Home Equity Interest Deduction
The IRS recently released clarification regarding the home equity loan interest deduction. Some taxpayers can continue to deduct interest paid on home equity loans under the new tax law. The Tax Cuts and Jobs Act of 2017 (TCJA), 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 will still be deductible, while interest on the same loan that is used to pay personal living expenses, such as credit card or student loan debts, is not deductible. Additionally, as mentioned in a previous post, the TCJA imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of new mortgages, down from the prior limit of $1 million. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.