HELOC interest potentially tax deductible

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A clarification has been issued by the Internal Revenue Service about the deductibility of interest that is paid on home-equity lines.

Under the Republican tax law, joint taxpayers can deduct interest on home loans. This includes first mortgages used to secure primary and secondary homes. OK. Sounds right. Nothing unusual so far…

What caused a ruckus was the suspension of the interest deduction for home-equity loans, home-equity lines of credit and second mortgages from 2018 until 2026.

But an exception exists!

WHAT?? Really? Tell me more!

The IRS clarified the new tax law in response to many questions submitted to the IRS by taxpayers and tax professionals. According to IR-2018-32 issued Tuesday by the agency, when HELs & HELOCs are utilized to buy, build or substantially improve the residential properties used as security for the loans, the interest is tax deductible. An example of a deductible expense is when the proceeds from the loan are used to build an addition to an existing home. On the other hand, if the proceeds from lines of credit are utilized to pay off personal expenses, no deduction is allowed.

As was the case under the prior law, the equity line loan must be secured by a primary residence or second home, not exceed the cost of the home, and meet other requirements.

How to proceed? Contact your tax professional. While the IRS provided the clarification, it also said “meet other requirements.” The IRS also did not distinguish how to apply if portions of the equity line was used. For example, what if someone has a $100,000 equity line. They use $80,000 for an addition to the home, but $20,000 to pay off credit card debt.

While this is welcome news, its application can still be tricky. Contact your tax professional today to find out more. If you need a referral to a tax professional, do let me know!

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