Q.  My wife and I have a home equity loan. In the past, we have been able to deduct the interest we paid on our taxes. However, under the new tax law, I hear conflicting opinions as to whether those interest payments are still deductible. Do you have any word on that?

A.  Thanks to a recent IRS guidance on topic, I believe I do. Responding to many questions received from taxpayers and tax advisors, the IRS recently released a statement to help clarify the issue. The guidance statement advises that, despite the new restrictions on home mortgage interest contained in the Tax Cuts and Jobs Act, taxpayers can often still deduct interest on a home equity loan, provided that the loan proceeds were used to “buy, build or substantially improve the taxpayer’s home that secures the loan”. However, if the equity loan proceeds have been used to pay credit card debt or other personal expenses, the interest is no longer deductible.

Further, if the equity line was taken out after December 15, 2017, there is also a dollar limitation: the sum of the loans to purchase the home, plus the new home equity loan, may not exceed a total of $750,000 in order for all of the interest on both loans to be deductible.  If the combined loans exceed $750,000, only a percentage of the interest payments will be deductible.

A bit of further good news for taxpayers with two homes: the new dollar limit applies to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and a second, vacation home.

Also, for the interest to be deductible, the home equity loan must be secured by the individual property which receives the benefit of the loan proceeds. Thus, if the home equity line is to be used to buy or improve the vacation home, it must be secured by that particular property.

All of these changes sunset at the end of year 2025.  What the rule will be thereafter is presently unclear.

The recent IRS Guidance [identified as IR-2018-32, Feb. 21, 2018] contains three examples which help illustrate the effect of the new law, and can be viewed on the IRS website, by an Internet search as follows: Start at www.IRS.gov, then go to “Tax Reform”, then go to “IRS News Releases & Statements”, and scroll down to this topic.

References:  IRS Guidance;  Tax Cuts & Jobs Act [Scroll to Section 11043 {“Limitation on Deduction for Qualified Residence Interest”], on pages 33–34; Internal Revenue Code Section 163 [“Interest”], and scroll to page 642;