Does the buzz about the new tax laws have you second guessing your second mortgage? Second guess no more!
The IRS has stated that taxpayers are, in many cases, still able to deduct interest on a home equity loan, a home equity line of credit, or a second mortgage. It does not matter how the loan is labeled. It does matter is how the proceeds are used/spent.
What has changed?
The Tax Cuts and Jobs Act of 2017 limited the interest deduction for home equity loans UNLESS they are used to buy, build, or substantially improve the home securing the loan.
Under the new laws, taxpayers can only deduct interest on $750,000 of a loan on a qualified residence, rather than $1 million in the past. If you are married filing separately, the interest deduction limit has decreased to $350,000 rather than $500,000. (Existing mortgages prior to December 2017 still retain the $1 million debt limit.)
What has remained the same?
The loan for which the taxpayer is deducting interest needs to be secured by a qualified residence (main home or second home). It cannot exceed the cost of the qualified residence.
- You can deduct the interest on a home equity loan for building an addition on to your existing home.
- You cannot deduct the interest on a home equity loan that you used to pay credit card debt.
- A taxpayer has a home with a cost of $700,000 with a mortgage of $400,000. In August 2018, the taxpayer takes out $200,000 to put an addition on their home. Both loans are secured by the qualified residence. The total of the loans ($600,000) qualifies since $400,000 is acquisition debt and $200,000 is improvement debt. Since the total does not exceed $750,000, all of the interest expense is deductible.
- In February 2018, a taxpayer takes out a $300,000 mortgage to purchase a main home. In September 2018, the taxpayer takes out a $100,000 loan, which is secured by the main home, to pay off their credit card debt. Since the second loan was used to pay a personal living expense, the interest on the second loan ($100,000) is NOT deductible.
Please let us help you determine if the interest you are paying on your loans is deductible before you second guess that second mortgage!