Are Home Equity Loans Deductible Again? Maybe
The IRS issued a news release on Wednesday clarifying that under the Tax Cuts and Jobs Act signed by the President in December interest on some home equity loans will still be deductible.
The new tax bill includes significant changes to the itemized deduction for home mortgage interest and we have received lots of inquiries from financial institutions looking for clarification on the new law. The IRS release provides several examples that lenders might find helpful in working with their customers.
Taxpayers may deduct interest on home mortgage loans that are “acquisition debt” under the new law. This means:
- Debt secured by the taxpayer’s principal home or secondary home, and
- Debt incurred in acquiring, constructing, or substantially improving the home
Customers take out home equity loans for a whole range of purposes. The IRS guidance clarifies that home equity loans that are used to acquire, construct, or substantially improve a home are still tax deductible (subject to the overall loan size limitations in the new tax bill). The fact that these loans are second mortgages isn’t a factor.
Deductibility is tied to the purpose of the loan. For example, a home equity loan used by the customer to build an addition on their home would be tax deductible. In contrast, a home equity loan used to buy a boat would not be deductible because the purpose of the loan does not tie back to acquiring, constructing, or substantially improving the home.
We don’t currently anticipate that the Form 1098s that financial institutions prepare annually will be expanded to include how the funds are being used. Ultimately, it is up to the customer and their tax preparer to determine if loan interest is deductible, but it is important for lenders to understand how these changes will impact their customer base.
If your institution would like to better understand the impact of tax reform, CLA can help.
Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
Comments are closed.