Posted on: December 5th, 2018

One of the many changes that went into effect with the tax overhaul earlier this year was the deductibility of interest accruing from home-equity debt. Previously, homeowners could deduct the interest from up to $100,000 of home-equity debt borrowed for any purpose. For example, if you borrowed $20,000 against your home to pay for a new car or a vacation, you could deduct the interest on that loan.

Under the new rules, however, homeowners may only deduct the interest if the loan is used to “buy, build, or substantially improve” their own homes. For example, an individual could borrow against his or her home to improve his or her home and deduct the interest, but could not deduct if for improvements made for the home of his or her child. Additionally, the debt must be secured by the home that the debt is for. A homeowner cannot borrow against one home to make improvements on the homeowner’s second home.

Another change is that borrowers may deduct the interest for home-equity debt equaling up to $750,000 for two homes. There is a grandfather provision, however, which allows deductions for home-equity debt equaling up $1,000,000 for two homes if the debt existed before the overhaul.

Finally, homeowners thinking about taking advantage of this tax deduction should remember the standard deduction changed earlier this year. Taxpayers filing as single and electing the standard deduction may now deduct $12,000 and taxpayers filing as married filing jointly may deduct $24,000. This increased from $6,350 for individuals and $12,700 for married couples filing jointly in 2017. Even with the ability to deduct certain types of home-equity debt, taxpayers might be better off if they simply choose to elect the standard deduction as opposed to their itemized deduction.

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