IRS Clarifies: Interest Paid on Home Equity Loans is Treated Differently Under New Tax Plan
By Elizabeth Stewart @ Real Estate Daily
February 23, 2018

The GOP’s latest Tax Cuts and Jobs Act made some major changes to the real estate industry. Some of the most notable revisions in the new plan included a reduced cap mortgage interest deduction and adjustment to the low-income housing tax credit. The tax plan’s impact on home equity loans and HELOCS, however, is less clear.

Key Takeaways

  • Interest paid on home equity loans, HELOCS, and second mortgage is still deductible under certain circumstances
  • Borrowers must use the money to “buy, build, or substantially improve” to deduct interest on these loans
  • Mortgage interest is deductible up to a limit of $750,000 on “qualified residence loans”


Citing the “many” questions it’s received from taxpayers and tax professionals, the Internal Revenue Service issued a bulletin this week that sheds some light on how home equity loans, HELOCs, and second mortgages will be treated under the new tax plan.

The headline news: The interest paid by borrowers on home equity loans, HELOCs, and second mortgages will still be deductible moving forward, but not in every case.

According to the IRS, the Tax Cuts and Jobs Act states that interest paid on home equity loans and lines of credit is still deductible, as long as they money is used to “buy, build or substantially improve” the taxpayer’s home that secures the loan in question.

But if the money is used to pay other expenses, the interest is not deductible.

The IRS explains further: “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,” the IRS stated. “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.”

View the original article at Housing Wire