Summary: An IRS advisory clarified the rules for deducting interest paid on a home equity loan. Homeowners in Washington can continue to deduct said interest if the loan is used to “buy, build or substantially improve” the property.
In a previous article, we wrote that tax deductions for home equity loans in Washington State and nationwide were largely a thing of the past. Many mainstream news sources were reporting the same.
The Internal Revenue Service recently published a news release in response to the “many questions received from taxpayers and tax professionals.” So even the CPAs were scratching their heads over this one. Thankfully, we now have some clarification on this subject.
The IRS news release provides some much-needed clarification. We now know that the interest paid on home equity loans in Washington can still be tax deductible, particularly if you’re using the loan to improve your home in some way.
Home Equity Loan Interest Still Deductible in Some Cases
On February 21, 2018, the Internal Revenue Service issued a public news release to let taxpayers know that “in many cases they can continue to deduct interest paid on home equity loans.”
Here’s the caveat: If you’re using the money to build or improve the property that’s being used as collateral for the loan, then the interest is probably tax-deductible.
According to the IRS news release mentioned above:
“The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. 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.”
So whether or not you’re able to deduct the interest paid on a home equity loan in Washington will largely depend on how you’re using the money.
- If you use the funds from an equity loan to pay for things like a kitchen renovation, a new roof, or an addition to your house, you should still be able to deduct the interest paid on the loan.
- But if you use the money received to take a vacation, pay off a student loan, or pay off credit card debt, the tax deduction won’t apply.
Many homeowners in Washington who take out home equity loans put the money right back into their homes, in the form of renovations, additions, and the like. The good news for these folks is that the tax deduction should still be allowed in most cases. Still, you might want to consult a CPA when filing, if you’d like to maximize your deductions.
There’s a Dollar Limit
The IRS update also pointed out that, under the new law, there’s a dollar limit on mortgage loans that qualify for interest deduction. Starting in 2018, taxpayers can deduct interest on just $750,000 in home loans. This cap applies to the combined total of loans used to buy, build or improve the homeowner’s main residence and (in some cases) a second home.
The IRS advisory offered some examples to clarify this. Here’s one of those examples:
In January 2018, a taxpayer takes out a $500,000 mortgage loan to buy a primary home with a market value of $800,000. In February 2018, that same person takes out a $250,000 equity loan to put an addition on the main home. Both of the loans are secured by the main home, and the total does not exceed the cost of that property. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Like most tax issues, this is a somewhat confusing subject. Hopefully you’ll find it a little less confusing after reading this article.