Home Equity Loan Interest Deductions Under the New Tax Law

The IRS has now clarified that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit or second mortgage, regardless of how the loan is labelled. Specifically, the new law eliminates the deduction for interest paid on home equity loans and lines of credit through 2026 unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.  Using refinance money to pay off credit cards or to take a vacation ,for example, will no longer be deductible.  I expect more guidance to be issued by the IRS in the coming months on this topic.

The new law puts a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018 you may only deduct interest on $750,000 of new qualified residence loans. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

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