The Internal Revenue Service (IRS) recently published clarification on how the new tax law impacts deductions for interest paid on home equity loans. The agency notes that there are restrictions, but many homeowners can still qualify for these deductions.
What types of home equity loans will qualify? Deductions will remain for home mortgages, home equity loans and second mortgages or home equity lines of credit (HELOC). Homeowners can generally still qualify for this deduction as long as the loan or line of credit was used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”
The deduction is generally allowed when applied to a loan used towards a home. The deduction will not be allowed if the loan is used for other expenses, like to pay off credit card debt.
Are there any other important changes that impact this deduction? Another change involves the value of the loan. Previously, a loan valued up to $1 million could qualify for the deduction. The IRS states that the new law reduces this amount to $750,000 for a married couple.
The limit is set for the total amount of all qualifying loans. The loans for both a primary and secondary residence are taken together to meet the $750,000 limit.
Could a failure to follow these changes trigger an audit? A number of factors can contribute to a tax audit by the IRS. It is possible that incorrect application of the new tax law could trigger an audit.
Whatever the reason or the audit, is generally wise to seek legal counsel. An attorney can provide a buffer between you, the taxpayer, and the IRS.