IRS says you can still deduct home equity loan interest
Clarifying the new tax law, the IRS notes that many taxpayers will still be able to deduct their interest from home equity loans.
It all depends on how you spend the money from your home equity loan, home equity line of credit or second mortgage. For old loans, you can still deduct your interest according to the old rules. For new loans in 2018, if you put that money back into your home, you can generally deduct the interest you pay on it. But if you use the money to pay for things like a vacation or credit card balances, you can’t deduct it. You also can’t deduct interest on a loan taken out against your main home to pay for another home.
Of course, all this only applies if you itemize deductions on your income tax return. The new tax reform law also nearly doubled the size of the standard deduction to $12,000 for singles and $24,000 for married couples, so your deductions would need to amount to more than those limits in order for them to make a difference on your taxes.
Other mortgage interest requirements also still apply. Those haven’t changed from the way deductions were allowed before December’s Tax Cuts and Jobs Act of 2017. Some of the main rules are that the loan must be secured using a qualified residence like your main or second home, and all financing secured by the home can’t add up to more than what the property is worth.
The total limit of deductible interest was also reduced with the new law. Now your home loan interest deduction ends when all of your loans total $750,000 (or $375,000 for married taxpayers filing separately).
Under the old law, you could deduct mortgage debt up to $1 million (or $500,000 for married taxpayers filing separately) plus another $100,000 in home equity debt.
The new changes are set to remain in effect from this year through 2025.
Borrowers today have lots of options for mortgages, home equity loans and home equity lines of credit. Learn more about them and compare rates from leading providers in our guide to home equity loans.
In related news, see how tax reform altered other areas of your finances and how financing for your home is likely to get more expensive in the future.