IRS: Interest paid on home equity loans is still deductible under new tax plan

But not in every case

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The country’s new tax laws, ushered in by President Donald Trump and his Republican counterparts late last year, will bring many changes to the mortgage industry.

Namely, the Tax Cuts and Jobs Act reduces the available mortgage interest deduction from $1 million to $750,000.

But what’s the impact of the tax plan on home equity loans, home equity lines of credit, and second mortgages?

Citing the “many” questions it’s received from taxpayers and tax professionals, the Internal Revenue Service issued a bulletin this week that sheds some light on how home equity loans, HELOCs, and second mortgages will be treated under the new tax plan.

The headline news: The interest paid by borrowers on home equity loans, HELOCs, and second mortgages will still be deductible moving forward, but not in every case.

According to the IRS, the Tax Cuts and Jobs Act states that interest paid on home equity loans and lines of credit is still deductible, as long as they money is used to “buy, build or substantially improve” the taxpayer’s home that secures the loan in question.

But if the money is used to pay other expenses, the interest is not deductible.

The IRS explains further: “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 stated. “As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.”

Besides being required to use the money for home improvements and the like, there are other limits on the home equity loan interest deduction

As stated above, beginning this year, taxpayers are only allowed to deduct interest on $750,000 of “qualified residence loans. Additionally, the mortgage interest deduction limit for a married taxpayer filing a separate return is $375,000.

As the IRS notes, these figures are down from the previous limits of $1 million, or $500,000 for a married taxpayer filing a separate return. 

The limits apply to the combined amount of loans used to buy, build or improve the taxpayer’s main home and second home, meaning a borrower may only deduct the mortgage interest on a total of $750,000 in loans, whether the loans are first mortgages, second mortgages, or home equity loans.

The IRS bulletin provides three examples to further demonstrate how the mortgage interest deduction works now:

  • Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. 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.  
  • Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
  • Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible.

Source: Ben Lane February 22, 2018 https://www.housingwire.com/

  Left to Right: Melissa Florance- Lynch, Carol Van Savage, John Walters, Mayor Jane Williams Warren, William Linteris,  Richard Scillieri

Left to Right: Melissa Florance- Lynch, Carol Van Savage, John Walters, Mayor Jane Williams Warren, William Linteris,  Richard Scillieri

PASSAIC COUNTY BOARD OF REALTORS (PCBOR) - Proudly Celebrates the Grand Opening of Military Food Pantry

Paterson marked Presidents Day by opening a food pantry for military veterans at the Gordon Canfield Senior Apartments on Ward Street. Rep. Bill Pascrell Jr., D-Paterson, and Mayor Jane Williams-Warren led the opening ceremony by paying tribute to the veterans and to the two organizations that started the pantry: the Passaic County Board of Realtors and the Paterson Great Falls Rotary Club. 

During a two-year period, Realtors had raised about $25,000. John Walters, APR Partner and former president of the board, was looking for a worthy cause. That's when he learned the Great Falls Paterson Rotary Club was deeply involved in helping veterans. 

"It was a no-brainer," Walters said of the donation. "I wanted to do something for veterans, especially those who are just coming back." 

Check out the Press PCBOR Received:  North Jersey  NJTV News Tap Into

 

Successfully Marketed ! SOLD

Beautiful 2 bedroom condo/town home located at 128 Allwood Rd., Clifton, NJ. 

 

 

 

 

 

On the left, John Walters Receives Passaic County Board of Realtors 2016 "Realtor of the Year" Award.

Congratulations John, you are making us proud.

-Your colleagues & friends at All Professional Realty.

 

 

 

 

All Professional Realty delivering Toys For Tots at the Butler Train Station today. What a great way to start the holiday spirit and let Santa know our holiday wishes first hand. Thanks to all the APR family team for your contributions and help today."

 The Toys for Tots Special Arriving At ButLer Train Station

The Toys for Tots Special Arriving At ButLer Train Station

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   It's that time of year again! With the rapidly approaching holiday season ALL PROFESSIONAL REALTY is happy to serve as a drop off location. Stop by our office located 9 Carey Avenue Suite 100 (across from the Butler Park) from 10-6 Monday thru Friday or 10-3 on Saturdays with your new, unwrapped toy. A small donation from you can make such a difference to the children served by this great organization. Thank you in advance for your generosity!

It's that time of year again! With the rapidly approaching holiday season ALL PROFESSIONAL REALTY is happy to serve as a drop off location. Stop by our office located 9 Carey Avenue Suite 100 (across from the Butler Park) from 10-6 Monday thru Friday or 10-3 on Saturdays with your new, unwrapped toy. A small donation from you can make such a difference to the children served by this great organization. Thank you in advance for your generosity!