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TAX CLIENT ADVISORY: Maybe… You Can Deduct the Interest on Your Home Equity Loan

New Law:  The 2017 tax act, effective January 1, 2018, denies the deduction of interest payments on home equity loans regardless of the date of the loan.

Clarification: In a recent news release, the IRS stated the interest on home equity loans will “often” still be deductible under the new law. The use of the funds determines the deductibility of the interest. https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

Documentation: If the funds were used to buy, build or substantially improve the taxpayer’s home and that home secures the loan, the interest will still be deductible.  It is the taxpayer’s responsibility to prove the use of the funds.  If the funds were used for other purposes, the interest will no longer be deductible.

Limitations:   When considering home purchase, the maximum mortgage limit is $750,000 (down from $1,000,000).  This includes a home equity loan balance.  Interest on a balance more than that amount will not be deductible.  This applies to mortgages obtained after December 31, 2017.  For homes under construction in 2017, an exception applies.  If the home is completed and the mortgage obtained by April 1, 2018, the $1,000,000 will still apply.

We will continue to post information to our website as the IRS provides clarification.