Yes, You Can Still Deduct Interest on Home Equity Loans Under the New Tax Law

While the new Tax Cuts and Jobs Act (TCJA) adversely shifts the playing field for home mortgage interest deductions, all is not necessarily lost. Many homeowners will be blissfully unaffected because “grandfather” provisions keep the prior-law rules in place for them.

That said, many homeowners will be adversely affected by the TCJA provision that for 2018-2025 generally disallows interest deductions for home equity loans. Once again, however, all is not necessarily lost. The little-known fact is that you still deduct home equity loan interest in certain circumstances. I’ll explain when after first covering the necessary background information.

Prior law: the ‘good old days’ for mortgage interest deductions

Before the TCJA, you could claim itemized qualified residence interest deductions on up to $1 million of home acquisition debt (meaning mortgage debt incurred to buy or improve your first or second residence and that is secured by that residence), or $500,000 if you used married filing separate status.

Under prior law, you could also claim itemized qualified residence interest deductions on up to $100,000 of home equity debt for regular tax purposes, or $50,000 if you used married filing separate status, regardless of how you used the loan proceeds. For Alternative Minimum Tax purposes, however, you could only deduct the interest if the home equity loan proceeds were used to buy or improve your first or second residence.

TCJA change for home acquisition debt

For 2018-2025, the TCJA generally allows you treat interest on up to $750,000 of home acquisition debt (incurred to buy or improve your first or second residence and secured by that residence) as deductible qualified residence interest. If you use married filing separate status, the debt limit is cut to $375,000.

TCJA change for home equity debt

or 2018-2025, the TCJA generally eliminates the prior-law provision that allowed you to claim itemized qualified residence interest deductions on up $100,000 of home equity debt ($50,000 for those who use married filing separate status).

Grandfather rules for up to $1 million of home acquisition debt

Under one grandfather rule, the TCJA changes do not affect up to $1 million of home acquisition debt that was taken out: (1) before Dec. 16, 2017 or (2) under a binding contract that was in effect before Dec. 16, 2017, as long as your home purchase closed before April 1, 2018.

Under a second grandfather rule, the TCJA changes do not affect up to $1 million of home acquisition debt that was taken out before Dec. 16, 2017 and then refinanced later — to the extent the initial principal balance of the new loan does not exceed the principal balance of the old loan at the time of the refinancing.

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