Understand the new tax rules for home-equity loans
Question: I have read conflicting stories about how the tax-reform plan that President Donald Trump signed into law in December affects home-equity loans. Can you help?
Answer: Sure. Under the Tax Cuts and Jobs Act that the president signed on Dec. 22, interest on a new second mortgage, home-equity loan or home-equity line of credit can be deducted only if the proceeds are used to build, buy or “substantially improve” the property that secures the loan. In addition, total debt on the property (including any first mortgage) cannot exceed $750,000 for joint tax-filers and $375,000 for single-filers. If it does, interest on the overage can’t be written off.
The new rules only apply to loans issued on or after Dec. 15, 2017.
Under the old law, homeowners could borrow against their built-up equity and use the proceeds any way they wished while still being able to deduct the interest on the new loan. A common strategy was to get a low-rate second mortgage or line of credit and then use the money to buy a new car or to pay off higher-rate, nondeductible credit cards or other debt.
That is no longer an option. Today, interest on the new loan proceeds can be deducted only if the money is poured back into the property. Any portion of the cash that’s used for other purposes is not deductible.
Talk to an accountant or similar professional for more details. I’d also usually recommend one or two free IRS publications that address this topic, but the agency still hasn’t updated them to reflect the recent changes in print or on its website, irs.gov.