In December 2017, the Tax Cuts and Jobs Act, also referred to as TCJA, altered the deductions a homeowner can take on a home equity loan and mortgage.
Prior to the TCJA, up to $100,000 of interest paid on a home equity loan could be deducted, despite how the loan was used. Post TCJA, there is a specific rule for what can and cannot be deducted with a home equity loan. As under prior law, the loan must be secured by the taxpayer’s home.
With the new tax rules, a home equity loan’s interest can only be deducted if the loan was used to acquire, build or substantially improve your home. This is contrary to the “old” tax law that allowed interest to be deducted for things such as paying off credit cards, etc.
The TCJA looks at the specific use of the loan and if it is used to add value to the home, rather than be used for things unrelated to the home’s market value.
Additionally, mortgages will be affected by the TCJA. In February 2018, the Internal Revenue Service, also referred to as the IRS, clarified what the new rules meant for mortgages. All mortgages secured prior to Dec. 31, 2017, will be grandfathered in, meaning that the $1,000,000 limit for interest deductions will still apply on remaining balances that existed prior to 2018.
Under TCJA, the limit has been changed to $750,000 for interest deductions on mortgages acquired after Jan. 1, 2018.
As we all adjust to the new Tax Cuts and Jobs Act, stay informed with the most up-to-date information so you can purchase or improve your home with ease now, and in the future. As taxpayers, consider consulting your tax professional if you have any further questions.
Marissa Krall is the marketing coordinator for Community Bank.