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IRS Clarifies Tax Deductions for Home Equity Loans

In the wake of the new tax law changes, many taxpayers were left wondering if their much-loved interest deductions on their home equity loans, home equity lines of credit (HELOC) and second mortgages were gone forever.

Amid growing concern, the Internal Revenue Service recently issued a bulletin that sheds light on how home equity loans will be treated under the new tax plan. According to the IRS, taxpayers can often still deduct interest on home equity loans, however restrictions do apply.

To qualify for the home mortgage interest deduction, the borrowed funds need to be used to buy, build or substantially improve the taxpayer’s home and the total debt on the home cannot exceed statutory limits. The amount of the first mortgage combined with the home equity loan debt, cannot exceed $750,000, the newly revised limit for taxpayers filing joint returns.

The new law eliminated the tax code that allowed homeowners to borrow against their equity and use the funds for whatever purposes they chose, while deducting the interest on their federal taxes. Gone are the days of using your home equity loan to buy a car, pay for college or that dream vacation all while deducting the interest from your taxes.

Homeowners can still tap into their home equity and use the cash for whatever purpose they choose, they just won’t be able to deduct the interest.

Also keep in mind another aspect of the new tax law is the standard deduction for taxpayers is doubling. In many cases, this change will lead taxpayers to take the standard deduction rather than itemizing and looking for all possible interest deductions.

Home equity loans will remain a popular option, whether the interest is tax-deductible or not, as interest rates are around half a percentage point below the prime bank rate.

Let us walk you through it! Give The Garatoni Group a call and we can help answer your questions on how the new tax laws affect you.