The IRS Disagrees With Congress And We’re Confused

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Part of the Tax Cuts and Jobs Act talked about home equity loans, aka HELOC. The interest on new HELOC loans would not be deductible. “New” is defined as any loans taken out after 12/31/17.

That seemed pretty clear, but then the IRS issued a statement, saying it was responding to “many questions received from taxpayers and tax professionals.” According to the statement, the new tax law suspends the deduction for home equity interest UNLESS the loan is used to “buy, build or substantially improve” the home that secure the loan.

In other words, if you take out a loan to fix the roof, get a new HVAC system or put in a pool, the interest is deductible. If you take out a loan to consolidate your credit card debit, the interest is not deductible.

At least that’s what the IRS has to say. Congress didn’t say that. We’ll see where this ends up.

Along that line, I received the following question at USTaxAid:

“I bought a second house for personal use. I used a home equity line of credit (HELOC) on my first house to pay for the down payment. I itemize deductions. Is any of the interest paid on the HELOC deductible?”

My first reading of the Tax Cuts and Jobs Act as written by Congress would say “No”. None of the interest would be deductible on a new loan.

The IRS’s take on it is that it would be deductible if the money was used on the first home. Although the loan is used to buy a home, the home is a second home. The IRS announcement clearly says that the loan must be used for the home securing the loan.

Based on that, the answer is still “No”. The interest is not deductible.

If, instead, the second property is a rental or business property, the interest would be deductible as an expense of the rental business.

Don’t miss out on “Taxmageddon 2018”, my new book due out May 2018. You will learn over 75 strategies like this to make sure you keep all the deductions available to you plus make use of some of the new ones!

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