Tax Deduction Confusion
On December 22, 2017, the Tax Cuts and Jobs Act was signed into effect starting January 1, 2018. The new law left tax payers and tax professionals confused about what is and what is no longer tax deductible. Most of the early reports indicated that homeowners would lose the ability to deduct interest paid on home equity loans (second mortgages) and home equity lines of credit (HELOC).
Tax Deduction Clarification
Further and closer review of the legislation uncovered good news for homeowners. Interest paid on home equity and HELOC loans will continue to be tax deductible for homeowners as long as two conditions are met:
- The proceeds from the loan must be used to make substantial improvements to the home that secures the loan
- The combined total of the first mortgage balance and the home equity/HELOC loan does not exceed $750,000.
IRS Clarification
The IRA issued notice IR-2018-32 on February 21, 2018 further clarifying the new law.
Example 1: 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 and credit cards, then the interest on the home equity loan would not be deductible.
Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible (see Publication 936).
For more information about the new tax law, visit the Tax Reform page on IRS.gov.
Whether all, some or none of the interest of a second mortgage or HELOC is tax deductible, these types of loans are still an easy, affordable means of accessing the equity in your home. We offer a full array of products including fixed rate, fixed payment loans and interest-only lines to suit your needs. Check out our current rates and call a friendly real estate representative for details at 888.858.6878.
The information in this article is not intended as tax or legal advice. Please consult a legal or tax professional regarding your personal tax situation.
Sources:
The Raddon Report: Update: Home Improvement and the Tax Implications for Home Equity, January 22, 2018 https://www.raddon.com/raddon-report/update-home-improvement-and-tax-implications-home-equity
IR-2018-32, Feb. 21, 2018 – IRS website https://www.irs.gov
