IRS Says Interest on Home Equity Loans Can Still be Deducted in Many Cases

The IRS wants taxpayers to know that they can continue to deduct the interest they pay on home equity loans “in many cases,” despite the limitations placed on mortgage interest deductions contained in the new tax law.  The IRS noted in a recent news release that “taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC), or second mortgage, regardless of how the loan is labeled,” as long as “they are used to buy, build or substantially improve the taxpayer’s” qualified residence that secures the loan.

For instance, if a home equity loan’s purpose is to finance an addition to the existing residence, the interest is usually deductible.  The interest on the same loan, if used to pay credit card debt, is not deductible.  The loan still needs to be secured by a main home or by a second home, cannot exceed the cost of the home, and is required to meet certain other requirements.

Beginning this year, the amount of the loan(s) for which interest can be deducted has been decreased to $750,000 of qualified residence loans ($375,000 for a taxpayer who is married filing separately), down from the previous limit of $1 million.  The limits apply to the total amounts of all loans used to purchase, build or substantially improve a main or second home.

The IRS provides three illustrative examples in its news release:  IR-2018-32.  Additional information may also be found in IRS Publication 936.