Home equity loan interest may still be deductible under tax law

Home equity loan interest may still be deductible under tax law

While many popular tax deductions were eliminated or reduced under tax reform, recent Internal Revenue Service guidance indicates that taxpayers still retain several home-related deductions.

Under the Tax Cuts and Jobs Act, the deduction for mortgage interest is now limited to $750,000 of total indebtedness.* While the change to the mortgage deduction was broadly highlighted, there has been confusion about the deductibility of interest on home equity lines of credit (HELOC). In response to inquiries from tax professionals, the IRS recently issued a clarification on the deductibility of HELOC interest.

HELOC interest may still be deductible if:

  • Proceeds are used to buy, build or substantially improve the taxpayer’s home that secures the loan
  • Aggregate indebtedness, including other mortgages, does not exceed $750,000

How the HELOC deduction works

In its release, the IRS cites the following example, “In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000.  In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home, and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans or credit cards, then the interest on the home equity loan would not be deductible.”

It is important for investors to discuss their individual financial situation with an advisor or tax expert, to understand the new parameters for home-related tax deductions. In many cases, taxpayers may still be able to deduct interest on a home equity loan, HELOC, or second mortgage.

* New limitation applies to mortgages after 12/15/17, older mortgages “grandfathered” under previous limit of $1 million of indebtedness.


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