Can I Still Deduct Home Equity Loans?

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Shutterstock_764447872The Tax Cuts & Jobs Act (TCJA) of 2017 eliminated the deduction of home equity loans.

Under the old law you could deduct mortgage interest for your qualified principal residence and one other home (such as your vacation home or RV).  There were limits:

  • Acquisition debt used to buy, build or substantially improve a qualified home was deductible on combined loans of $1 million or less
  • Home equity loans or lines of credit were deductible up to $100,000 in debt no matter how the proceeds were used.

Under the new law, the deduction for interest from home equity debt is eliminated for 2018 to 2025 and acquisition debt is reduced to loans totaling $750,000.  (Loans related to purchases before 2018 are grandfathered into the $1 million dollar debt, even if later refinanced.)

Tax Blueprint Planning Tip:

If you take out a new home equity loan and use the proceeds for home improvements that “substantially improve” a qualified home (such as adding a pool or remodeling your kitchen), it is treated as acquisition debt and is thus deductible.

So rather than using your own funds to improve your home, take out a loan and use your personal funds for non-deductible items.  This is one way to convert non-deductible interest into a deductible item.

The IRS has allowed this interpretation of the rules (IRS Information Release IR-2018-32, dated 2/21/18).