Interest on Home Equity Loans
May Be Deductible After All
Jackie Himes, CPA
Focused on You. Dedicated to Your Success.
March 19, 2018

Most thought that interest on home equality loans was no longer available thanks to tax reform. As reviewed in our December 20 alert on the Tax Cuts and Jobs Act (TCJA) , TCJA imposed a limit on the mortgage interest deduction and eliminated (from 2018-2026) the home equity debt deduction.

Apparently, there are circumstances in which a taxpayer can still take the home equity interest deduction. Last month, the IRS issued a clarification stating: “Despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled. The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, 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.”

The IRS explained that: “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.”

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 qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $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.

As always, we are here to help. Feel free to call any member of our team at 610-828-1900. Or contact either Jackie Himes, CPA, tax manager at Jacquelyn.Himes@MCC-CPAs.com or myself Marty.McCarthy@MCC-CPAs.com
Martin C. McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company, PC

Disclaimer This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).