This post was written by Matthew Rak.
The Tax Cuts and Jobs Act (TCJA) passed in December, 2017 limited the deductibility of home mortgage interest to $750,000, down from the prior limit of $1 million. At the same time, the deductibility of home equity loan interest (HELI) was eliminated. Prior to the TCJA, the deductibility for home equity loan interest was limited to debt of up to $100,000.
On February 21, 2018, the IRS issued notice IR-2018-32. The notice clarified that HELI is still deductible, provided that (i) the proceeds are used to purchase, build, or improve the home securing the loan and (ii) the total of the primary mortgage and home equity loan balance does not exceed the $750,000 limit.
Taxpayers should use caution when using home equity loan proceeds for home construction that the proceeds are traceable to the construction under the tracing rules prescribed by Treasury Regulation § 1.163-8T in order to preserve the interest deduction. For more information, please contact a member of Metz Lewis’ Tax, Trusts, and Estates Group.