Based on questions we’ve received from clients there is some confusion about the new rules for deducting home equity interest under the Tax Cuts and Jobs Act. Starting in 2018 you can only deduct purchase mortgage interest. As of 1-1-18 you can no longer deduct interest paid on home equity debt. Home equity debt is a debt on your residence that was not used to purchase or improve your residence. For example, using a home equity credit line to purchase a car. Purchase mortgage interest is interest on debt that was used to purchase or improve your residence.

What can be confusing is that home equity debt is determined by what the money was used for, not the type of loan. A home equity credit line used 100% to remodel your home will continue to be deductible in 2018. And if you’ve refinanced your primary mortgage in the past and taken out cash that was not used to improve your residence then some of the interest on your primary mortgage will not be deductible starting in 2018.

There are also new limits on the total amount of purchase mortgage interest you can deduct. For debt incurred before 12-14-17 you can deduct the interest on purchase mortgage debt up to $1,000,000 in loan balance. For debt incurred after 12-14-17 you can only deduct interest on purchase mortgage debt up to $750,000.

This is a very brief overview of the rules. Contact us if you’d like to discuss in more detail.