Home Equity Loan Deduction Changes

We’re just over one month into the tax return filing season for the 2018 tax year, and many taxpayers are surprised to learn about the new restrictions on deducting home mortgage interest for home equity loans and lines of credit.

The Major Change
No longer can you deduct loan interest paid on home equity loans or lines of credit, unless the loan proceeds were used to buy, build or improve a home.
 
So if you took out a home equity line three years ago and used the proceeds solely to payoff credit card debt, the interest on that loan is no longer deductible on your tax return.
 
This same restriction applies to first mortgage loans that have been refinanced. If any proceeds from a refinance are used for a purpose other than to pay off the existing principal loan balance and/or make home improvements, that portion of the loan becomes ineligible for an interest deduction.
 
For example, if you refinance your existing $300,000 loan with a new $400,000 loan and use the $100,000 in “cash-out” proceeds to pay off debt, you will only be able to deduct 75% of the loan interest on that new loan. That’s because only $300,000 out of the $400,000 loan is qualified interest.
 
Feel free to contact us if you have questions about your specific mortgage deductibility.