If you’re slightly confused regarding how the Tax Cuts and Jobs Act affects your personal tax strategy, you’re not alone. One of the primary causes for confusion is the disconnect between lawmakers and the IRS. Even though the new law drastically changes tax law, it has left the IRS scrambling to confirm the rules within its own set of guidelines. This confusion has left tax planning professionals, CPAs, and everyday Americans awaiting IRS approval of numerous tax deductions. One recent example approved by the IRS gives homeowners the ability to write off the interest paid on home equity loans. But, the home equity tax loophole does have a few caveats.
Home Equity Loans in 2018
First, deductions for interest paid on home equity debt are no longer allowed beginning in 2018. Before this, you could safely write off all interest paid on the first $100,000 of a home equity loan no matter how you spend the proceeds. Under the new law, if the home equity loan or line of credit is used for home improvements, then the interest paid on the credit is tax deductible. The new mortgage deduction affects homes purchased on December 14th, 2017 until 2026.
Requirements for Home Equity Tax Loophole
As aforementioned, there are several requirements in order to qualify for the mortgage interest tax deduction. The house for which you take the home equity loan out will need to be a “qualified residence,” such as your primary residence or vacation home. Additionally, the proceeds of the home equity loan must be used for home improvements which “substantially improve” the residence. By utilizing this new loophole, you will be converting a home equity debt into an acquisition debt because the new home equity loan is going toward home improvements. While it won’t affect the majority of Americans, the law also caps the interest deductions on acquisition debt up to $750,000. In addition, interest deductions for prior acquisition debt loans (loans made prior to December 15, 2017) are “grandfathered” and can still be deductible.
Contact Your CPA to Maximize Deductions
The main point of the new home equity tax deduction rules is taxpayers can continue to deduct interest paid on home equity loans provided they spend the money on home improvements. While this tax deduction technique was initially under heated debate, the IRS issued a statement in February 2018 approving the tax avoidance loophole. By working with a professional CPA, you will gain access to a wealth of additional tax reduction measures that you may be unaware of.
Contact a Lawhorn CPA Group professional today to ensure you are working within IRS guidelines and that you secure the maximum deduction for your home equity loans and other expenses. Feel free to call us at 865-212-4867 or contact us online HERE.