Getting a tax benefit out of your home just became a little more difficult. Homeowners have long used the equity in their homes as collateral to secure loans. Whether a home equity loan (typically fixed amount, term, and payment) or a home equity line of credit (a revolving credit line), individuals borrowed to get cash. The interest paid on these loans was often reported as mortgage interest for taxpayers itemizing on Schedule A. Responding to many questions received from taxpayers and tax professionals, the IRS said that despite newly-enacted restrictions on home mortgages, 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 labelled. The Tax Cuts and Jobs Act of 2017, enacted December 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 card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements. Comments are closed.
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