The new tax law eliminated the deduction for interest paid on home equity lines of credit (also called home equity loans or second mortgages). But the interest paid on these loans may still be tax deductible if the loan meets specific requirements.
Interest paid on loans used to buy, build, or substantially improve your home is still tax deductible if the home secures the loan. For example, interest paid on a home equity loan secured by your home to remodel your kitchen may be tax deductible if the loan meets other criteria.
The loan must be secured by your home. Interest paid on loans not secured by your home is not tax deductible. Tax Trap: Interest paid on a loan secured by your primary residence used to purchase a second home (e.g., vacation home) is not tax deductible. So it is best to use the second home as security for the loan.
It gets even more complicated. The old law that allowed you to deduct interest paid on home equity loans secured by your home overrode what is called the “interest tracing rules.” For example, you may know that interest paid on your credit card is not tax deductible. But under the old law, interest paid on a home equity loan used to pay off credit card debt was tax deductible if the loan met other specific criteria. The IRS did not “trace” how you used the loan. If your home equity loan met specific criteria, the interest was tax deductible.
Under the new law, the “interest tracing rules” become more important because it may allow you to deduct interest paid on a home equity loan. For example, if you use a home equity loan to purchase a rental property, you can “trace” the interest paid to the rental property and tax deduct the interest. Tax Trap: You must make an election to trace the interest to the rental property.
Our company has experience with these rules, and we are available to assist you. Please call us at 323-285-9880 for additional information.
Disclaimer: Tax laws are complicated and your taxes are unique to you. A law favorable to you may not be beneficial to the next person because the facts and circumstances are different. Our blog posts are very broad and do not provide specific tax advice to you for which you can use for tax planning purposes. Therefore, we highly recommend you contact us before taking any action concerning the content of this post.