The home equity loan deduction gets a second life
At the end of February, the IRS issued a statement announcing that interest paid on home equity loans is still deductible under the new tax law if it is used for home improvements. The deduction was declared dead by a number of tax experts following the passage of the Republican tax bill at the end of 2017.
“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,” according to the statement. “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 issued the clarification after receiving a number of inquiries from taxpayers and associations such as the National Association of Home Builders (NAHB), according to Bloomberg.
After President Donald Trump signed the new tax bill into law, many — including the NAHB and experts interviewed by Marketplace — interpreted the law to mean that the deduction was dead. The IRS told Bloomberg that this is not a new rule but a clarification.
Under the new guidelines from the IRS, homeowners who use their home equity loans for purposes other than home improvements will still not be able to deduct the interest. According to a 2007 U.S. Census report, 45 percent of borrowers took out home equity loans to make renovations. About a quarter did so to pay off debts, while 9 percent used the loans to buy a car and about 4 percent used them for medical emergencies and to pay for tuition.
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