Responding to many questions received from taxpayers and tax professionals (yep, that is us), the IRS said despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELCO) or second mortgage, regardless of how the loan is labelled. The Tax Cuts and Jobs Act of 2017, enacted Dec 22 suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit car debt , is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (know as qualified residence), not exceed the cost of the home and meet other requirements.
For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.
At Bourke Accounting we receive updates as the law changes (or evolves as we like to say) and we pass them on to you by many means. If you have any questions or concerns on your financial wellness, come see us. Stop by today or give us a call at 502-451-8773. See you soon!