Contrary to early reports, the Tax Cuts and Jobs Act of 2017 allows taxpayers who buy, build or substantially improve their homes using either a home equity loan, home equity lines of credit (HELOC) or second mortgages to deduct interest on the loans. That's the good news. But if you take out the loan to pay for personal living expenses—credit card debt, for instance—you can't deduct the interest from your taxes.
The IRS gave this guidance in response to many questions from taxpayers like you, as well as tax professionals. The agency explained that, just as older rules had specified, the loan must be secured by your main home or second home—known in IRS parlance as qualified residences—and must not exceed the cost of the home.
There is, though, a lower dollar limit on mortgages qualifying for the home mortgage deduction: You may deduct interest on only $750,000 of qualified residence loans. The maximum is $375,000 if you're married and filing a separate return, which is also down from prior limits. These limits apply to the combined amount of loans used to buy, build or substantially improve your main or second home.
The IRS gave three examples to help clarify its thinking:
The key takeaway here is that the rules are subtle but complicated, and an error can cost you thousands of dollars. Before making assumptions about the tax implications of any mortgage product, give us a call and we'll see how the rules apply to your situation.
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