Goodspeed: New rules for home equity loan deductions
QUESTION: Do the new rules on deducting interest on home equity loans apply to my 2017 taxes? How should I document that the money borrowed was used for allowable purposes?
ANSWER: To back up a bit: The new tax law passed by Congress and signed by the president in December 2017 changed the rules on when the interest paid on home equity loans can be deducted.
The law suspends the interest deduction for home equity loans from 2018 to 2026 unless the loan is used to buy, build or substantially improve the home that secures the loan. In other words, if you take out a home equity loan to pay for an addition, new roof, kitchen renovation or other major improvement to your main home or second home, you can still deduct the interest on the loan. But if you use the money to pay off credit card debt, student loans, buy a new car, go on vacation, pay for a wedding, etc., the interest on the loan is no longer deductible.
The new law also reduces the dollar limit on mortgages that qualify for the interest deduction to a total combined mortgage debt of $750,000.
The new rules take effect in 2018. This means that the interest you paid on a home equity loan or line of credit in 2017 will generally be deductible on the return you file this year, regardless of how you used the money. But the interest may not be deducted on next year’s tax return depending on how you spend the money.
Regarding your question about how to document how you used the money, there is no clear answer as of yet. It is quite likely that some borrowers might use some of the money from a home equity loan to put in a new kitchen, and some of the proceeds to go on vacation. So documenting how the money is used is going to be an issue.
I can foresee the IRS creating a new form for home equity loans and allowable interest deduction uses. In any event, you should always keep good receipts and records on home improvement projects. You may need them not only to justify deducting the interest on a home equity loan, but also for tax basis purposes should you ever sell.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: firstname.lastname@example.org.