Clearing Up The Confusion: Deducting Mortgage and Home Equity Interest In 2018

You probably know that last December’s Tax Cuts and Jobs Act changed the rules for deducting mortgage and home equity interest.

Now, the IRS has fine-tuned the new guidelines, clarifying that you are allowed to deduct home equity interest in some cases.

Here’s a quick summary. As always, consult your tax advisor for details relating to your situation.

Mortgage interest

There are new caps on mortgage deductions. There is no change to mortgages taken out on or before December 15, 2017. But after December 15, 2017, interest can be deducted only on mortgages up to $750,000 (as compared to $1 million before the new tax law).

Keep in mind that you can still refinance and continue to deduct interest on your existing pre-December 15 loans up to the $1 million cap.

And yes, you can still deduct the mortgage interest on a second home, subject to the limitations above.

Home equity loans

There’s also a new wrinkle for home equity loans. The IRS recently issued guidance confirming that you can still deduct interest on your existing home equity loans, and also on new home equity loans taken out after 2017, for “acquisition debt,” which means loans where the funds are used to buy, build, or substantially improve a primary or second home, and the loan is secured by the home.

If the purpose of the home equity loan is not to buy, build or improve the property, the interest is NOT deductible. Examples of what is NOT deductible would include home equity loans to pay off credit card debt, buy a car, go on a trip, or pay for college.

The Takeaway: How will the IRS police whether you borrowed funds for a trip to Cancun or to retile your bathroom? Good question. Keep good records and receipts to justify how you spent your loan dollars.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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