If you are one of many who worried that the Tax Cuts and Job Acts of 2017, which took effect in December, would completely diminish your chances of deducting interest from your home equity loan or line of credit, you are not alone. In fact, the I.R.S. issued an advisory due to the number of inquiries from tax professionals and taxpayers alike they received regarding this new law. While it remains true that in most cases that interest is not deductible, there’s still one case in which it is indeed deductible.
If the loan is used to “buy, build or substantially improve” your home, you can still deduct the interest. However, if the loan is used for other purposes, such as credit card debt or student loans, you cannot deduct the interest. You can still use home equity loans to pay off these other items, but the interest will not be deductible unless the money was used towards home renovations of some sort. In addition, the new law limits the total amount of loans used to buy, build, or improve your main or second home that taxpayers may deduct interest on to only $750,000. Any interest paid on loans that exceed $750,000 for the taxpayer’s primary or second home will not be deductible. If you are using the loan for home improvement purposes, it is recommended that you keep receipts and records in the event that the I.R.S. requests proof.
The new law and these changes will apply to filing taxes for 2018, but will not affect 2017 taxes. As always, please consult your accountant or a tax professional directly for details on how these changes will affect you.
Source: The New York Times