The Internal Revenue Service said Wednesday that taxpayers can continue to deduct the interest they pay on home equity loans “in many cases,” despite the new tax law’s limitations on the mortgage interest deduction.

The IRS is getting blitzed by questions from taxpayers and tax professionals alike, asking if the restrictions in the Tax Cuts and Jobs Act on the mortgage deduction also apply to home equity loans. The IRS said Wednesday that despite the newly enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, a home equity line of credit or a second mortgage, no matter how the loan is labeled. The new tax law that was passed in December suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, the IRS pointed out, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

For instance, under the new tax law, the interest on a home equity loan for building an addition to an existing house is usually deductible, although interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan needs to be secured by the taxpayer’s main home or by a second home, known as a qualified residence. But it can’t exceed the cost of the home, and the loan also needs to meet other requirements.

While the new tax law was being negotiated last year, the mortgage industry and home builders were worried that lawmakers might eliminate the mortgage interest deduction entirely. However, in the end, lawmakers decided to scale back the upper limitations on the deduction instead of getting rid of it completely.

For taxpayers who are trying to decide whether to get a mortgage, the IRS noted that the new tax law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Starting this year, taxpayers can only deduct interest on $750,000 of qualified residence loans, or $375,000 for a married taxpayer filing a separate return. That’s down from the previous limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the total amount of loans used to purchase, build or substantially improve a taxpayer’s main home and a second home.

The IRS provided a few examples to show how the new law works:

Example 1:

In January 2018, a taxpayer gets a $500,000 mortgage to buy a main home with a fair market value of $800,000. The following month, 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 doesn’t exceed the home’s cost. Because the total amount of both loans doesn’t exceed $750,000, all the interest paid on the loans is deductible. But 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 wouldn’t be deductible.

Example 2:

In January 2018, a taxpayer gets a $500,000 mortgage to buy a main home. The loan is secured by the main home. The following month, the taxpayer takes out a $250,000 loan to buy a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages doesn’t exceed $750,000, all the interest paid on both mortgages is deductible. But if the taxpayer got a $250,000 home equity loan on the main home to buy the vacation home, then the interest on the home equity loan wouldn’t be deductible.

Example 3:

In January 2018, a taxpayer takes out a $500,000 mortgage to buy a main home. The loan is secured by the main home. In February 2018, the taxpayer gets a $500,000 loan to buy a vacation home. That loan is secured by the vacation home. Because the total amount of both mortgages is more than $750,000, not all the interest paid on the mortgages is deductible, but a percentage of the total interest paid would be deductible.

From RAM Government Affairs Director Lawrence Carnicelli:

The REALTORS® Association of Maui had a stellar 2017 with our advocacy program. We strengthened our relationships with our friends and we established new friendships all across the board.

We also made great headway on last year’s priorities list with successes in affordable housing, invasive species and water rights. Best of all we had, what NAR is calling, one of the best calls for action nationwide with our opposition to a bill that would have potentially affected 1,700 long-term rentals.

I would like to personally thank my entire GAC crew for their dedication and passion to serve our community. I would also like to thank all of you for the encouragement and support of the Government Affairs program and advocacy for homeownership and property rights. I look forward to a successful 2018 with your support!

RAM Advocacy By The Numbers

 

794

Items introduced at the County that were reviewed

263

County meetings monitored

86

County meetings attended

64

Personal individual discussions with elected officials

58

Verbal testimonies given

27

Written testimonies submitted

29

Community meetings attended

121

Volunteer grassroots meetings

446

Volunteer hours (extremely under reported)

1

Local RAM Call-for-Action

287

Member responses to the Call-for-Action

1

Successful Call-for-Action

1,700

Long-term rental units preserved by RAM

$8,300,000+

Taxpayer money saved by RAM

(includes the call for action and member education on homeowner exemptions)

The National Flood Insurance Program (NFIP) is set to expire on September 30th if Congress does not take action. During the past month, there has been a lot of activity on Capitol Hill surrounding the reauthorization of the NFIP. NAR has been actively engaged in trying to shape various pieces of legislation in accordance with NAR’s flood insurance policy principles.

You can also check out NAR’s complete taking points here.

As previously reported, at the state level HAR was able to get the corrective legislation passed onto the Governor for signature to keep Hawaii in the NFIP.  That bill is NOT on the Governor’s veto list so it is set to become law on July 11th.