HELOCs and Tax Deductibility

A clarification has been issued by the Internal Revenue Service about the deductibility of interest that is paid on home-equity and junior-lien products. The Tax Cuts and Jobs Act of 2017 was approved by Congress and signed into law last year by President Donald Trump and enacted on Dec. 22. Under the law, joint taxpayers can deduct interest on home loans up to $750,000. Married taxpayers filing separately can each deduct interest on loans up to $375,000. Among the provisions of the legislation is a suspension of the interest deduction for home-equity loans, home-equity lines of credit and second mortgages from 2018 until 2026. But an exception exists, according to IR-2018-32 issued by the agency. The clarification comes in response to many questions submitted to the IRS by taxpayers and tax professionals. When HELs & HELOCs are utilized to buy, build or substantially improve the residential properties used as security for the loans, the interest is deductible. An example of a deductible expense is when the proceeds from the loan are used to build an addition to an existing home. But if the proceeds are utilized to pay off personal expenses like credit cards, no deduction is allowed. As was the case under the prior law, the loan must be secured by a primary residence or second home, not exceed the cost of the home and meet other requirements.

© Kevin Schill 2018