The Internal Revenue Service has advised taxpayers that interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. Click here to view the announcement. Here are three examples from the announcement with updated dates:
1. ARE YOU USING THE FUNDS FOR HOME IMPROVEMENTS?
In January 2023, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2023, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
2. IS THE LOAN ATTACHED TO THE RIGHT PROPERTY?
In January 2023, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2023, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
3. ARE YOUR TOTAL BALANCES LESS THAN $750,000?
In January 2023, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2023, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible.
PLEASE NOTE: THIS OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.