The IRS has issued a response to many questions they have received on the Home Equity Loans (HELOC) interest.
The Tax Cuts and Jobs Act stated that interest from HELOC loans would not be deductible. Existing HELOC loan interest, in place before January 1, 2018, would be deductible. But new loans would not.
At least that’s what the Tax Act itself said. For details, we have to wait for the IRS. And bit by bit, they are releasing statements.
This past week, they issued a surprising statement regarding Home Equity loan interest. It appears that this is actually different from what the Tax Act itself says.
The IRS’s statement is:
“The Internal Revenue Service today advised taxpayers that in many cases they can continue to deduct interest paid on home equity loans.
Responding to many questions received from taxpayers and tax professionals, the IRS said that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled. The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.”
In other words, if you can show that the HELOC was used to improve your home, it is deductible. Also, if you can show that the HELOC was used for your business, the interest is a deductible business deduction. If you can show that the HELOC was used for your real estate, the interest is a deductible real estate expense. It appears that the rules regarding investment interest have changed, though. Don’t count on having the same leeway with investment interest expenses.
Keep watch at this blog for more statements from the IRS and the strategies you can use to put them in place so you pay less tax and put more of your money in your pocket.