One of the more troubling aspects of the Tax Cuts and Jobs Act of 2017, enacted December 22, 2017, was the apparent elimination of the deduction for interest paid on home equity loans and lines of credit. This seeming elimination of an extremely popular tax benefit raised the ire of taxpayers, who along with tax professionals, deluged the IRS with inquires whether this deduction had in fact been eliminated.
On February 21, 2018, the IRS in Announcement IR-2018-32, clarified the confusion and announced that taxpayers can still deduct interest on a home equity loan, home equity line of credit, or second mortgage, regardless of the label of the indebtedness, provided the loan is used to buy, build or substantially improve the taxpayer’s home (first or second) that secures the loan. Thus, interest on such loans used to pay personal living expenses, such as credit card debt, is no longer deductible.
The 2017 Bill’s lower mortgage threshold applies to the home equity interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These limits apply to the combined amount of loans used to buy, build, or substantially improve the taxpayer’s main home and second home.