The IRS clarified in its News Release on February 21, 2018 that taxpayers can continue to deduct the interest on home equity loans, if the home equity loans are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
Under prior tax law (pre-2018), the interest on a home equity loan secured by the taxpayer’s qualified residence was deductible (on a loan balance of up to $100,000) even if the loan was used to pay personal living expenses, i.e., paying off credit card debts, student loans or buying a car.
Starting in 2018, the new tax law does not allow taxpayers to deduct the interest on a home equity loan if the loan was used for personal living expenses.
In order for home equity loan interest to be deductible, the following conditions must be met.
- The home equity loan must be used to buy, build or improve the taxpayer’s qualified residence (either a primary or a secondary residence).
- The home equity loan must be secured by the taxpayer’s qualified residence. For instance, if a taxpayer takes out a $250,000 home equity loan to buy a vacation home, the loan must be secured by the vacation home in order to for the interest on the loan to be deductible. If the loan is secured by the main home, the interest is not deductible.
- Taxpayers can only deduct interest on up to $750,000 of qualified residence loans ($375,000 for a married filing separately), which can be a first mortgage, or a home equity loan, or any combination of the two.
- The total outstanding loan balance cannot exceed the cost of the qualified residence.
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