The Internal Revenue Service clarified today that interest paid on home equity loans and second mortgages can be deducted from taxes under the new tax package if they are used to "buy, build, or substantially improve the taxpayer's home" that was used to secure the loan.
The agency's announcement should help calm some fears that arose from the Tax Cuts and Jobs Act of 2017, after it was enacted Dec. 22. But more clarification may be needed to determine how the IRS "substantially improve" these days. One of the three examples the IRS cites involves putting an addition onto a home, so that work clearly meets the agency's standard.
The tax reform bill was often reported as barring taxpayers from deducting much of the interest paid on Home Equity Lines of Credit (HELOCs). The IRS' statement today indicates taxpayers can continue to deduct interest for loans related to real estate activities while barring interest paid out of the same HELOC for items such as personal living expenses.
The deduction is subject to another part of the tax reform package that limits total interest paid on residence loans to the first $750,000 of the amount borrowed for a couple and $375,000 for a married taxpayer filing a separate return. (The previous limits were $1 million and $500,000, respectively.) This means that the amount of the loan on which interest is paid under both the first mortgage and the HELOC combined cannot exceed the new limits.
Groups including the National Association of Home Builders (NAHB) had spotted the potential in the new tax bill and pressed the IRS to make such a clarification. After hearing the news, NAHB Chair Randy Noel declared the association's happiness.
"This is a major victory for remodelers and for home owners that want to invest in their homes," Noel said in a statement. "NAHB has been pushing hard for this outcome since December, when The Tax Cuts and Jobs Act of 2017 was signed into law. We will continue to work with Congress and the Administration as they hammer out the details of the new tax law.”
