Good news! The IRS has just confirmed that taxpayers can continue to deduct the interest they pay on home equity loans when the funds are used for home improvements.
In its statement, the IRS said despite the restrictions on mortgages, taxpayers can, in most cases, still deduct interest on home equity loans, a home equity line of credit, or a second mortgage.
The new tax law suspends the deduction for interest paid on home equity loans and lines of credit unless the funds are used to buy, build, or substantially improve the taxpayer’s home, the IRS notes. If you build an addition to an existing home it would generally be deductible, If you used the loan to for personal living expenses, it would not be.
Under the new tax reform starting in 2018, taxpayers can only deduct interest on $750,000 of qualified residence loans, or $375,000 for a married taxpayer filing a separate return—down from $1 million or $500,000 for a married taxpayer, respectively.
Source: IRS; “IRS Says Interest on Home Equity Loans Can Still Be Deducted,” Accounting Today (Feb. 21, 2018); National Association of Home Builders