The Tax Cuts and Jobs Act of 2017 affected the tax deduction for interest paid on home equity debt as of 2018. Under prior law, you could deduct interest on up to $100,000 of home equity debt, no matter how you used the money. The old rule is scheduled to return in 2026.
The bad news is that you now cannot deduct interest on home equity loans or home equity lines of credit if you use the money for college bills, medical expenses, paying down credit card debt, and so on. The good news is that the IRS has announced “Interest on Home Equity Loans Often Still Deductible Under New Law.” (See IRS Information Release IR-2018-32.)
According to the IRS, even if a loan is labeled “home equity,” the interest may be deductible on your tax return. The key is how the borrowed money is used. In addition, the $100,000 ceiling doesn’t apply.
For home loan interest to be tax deductible, the taxpayer that secures the loan must use the money to buy, build, or substantially improve his or her home. Beginning in 2018, taxpayers may only deduct interest on $750,000 of such “qualified residence loans,” or $375,000 for a married taxpayer filing separately.
Those numbers apply to the total of a taxpayer’s home loans, but older loans up to $1 million and $500,000, respectively, may have fully deductible interest. As before, home loan interest on debt that exceeds the cost of the home won’t be eligible for an interest deduction, among other requirements.
The bottom line is that if you intend to use a home equity loan to buy, build, or substantially improve a home, you should be careful about how the debt is secured. Be prepared to show that the money really was used for qualified purposes.
Moreover, qualified home loans obtained on or before December 15, 2017, are grandfathered, with tax deductions allowed for interest up to $1 million or $500,000. Some questions remain, though, about how refinancing those grandfathered loans will affect the tax treatment. If you are considering refinancing a home loan that’s now grandfathered, our office can provide the latest guidance on how your taxes might be affected.