New Tax Law FAQ: Can I Still Deduct the Interest on My Home Equity Loan?

By Doug McDonald, CPA

There have been rumors floating around about the new tax law, also known as the Tax Cuts and Jobs Act of 2017, since it passed late last year. As a result, you may have heard that it's no longer possible to deduct the interest on a home equity loan. Fortunately, this is not completely true. Although the new law does bring some changes to this area, there are still times when you can deduct the interest. 

What's been done previously? 

Home equity loans are any amount of money borrowed against the equity in your home. Common examples included a home equity line of credit, as well as refinancing your mortgage to where the new loan balance exceeds the old. Before the new tax law passed, you could use $100,000 of your home equity loan for any purpose, even for personal use, and deduct the related interest. 

What's changed? 

Now, the rules regarding these types of deductions have narrowed considerably. Generally, you can only deduct the interest on a home equity loan if it's used to buy, construct, or improve your primary or secondary home. For instance, if you used a home equity line of credit to finish your basement, the interest on the loan would be deductible. The new law also—in most cases—allows for loan proceeds that are used for business or investment purposes to be deducted, too. An example of this would be if you refinanced your mortgage and took out the proceeds to start a business. In this situation, you would likely be able to deduct the loan interest against the business income. The new home equity interest deduction changes start in 2018 and apply to any home equity loan, regardless of when it was initiated.

What should you do? 

There are many rules around deducting the interest on a home equity loan, as well as the $750,000 overall home loan limit. As I mentioned above, the changes ushered in by the new tax law are effective for tax year 2018, which means the actions you take now matter. In some cases, it may be highly advantageous to pay off any home equity loans that you aren't using for home, business, or investment purposes. 

At the least, you should be taking a good, hard look at how these changes could affect you. If you have questions, be sure to contact your tax advisor as soon as possible.