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News & Knowledge

Think Twice Before Taking Out a Home Equity Loan

February 07, 2018

By: Amanda Wilson

Last year’s Tax Cut and Jobs Act (the “Act”) introduced many tax changes on the individual return front. One rule that has seen important changes is the home interest deduction.

Under the prior rule, a taxpayer could deduct interest on up to $1 million ($500,000 for a married person filing a separate return) in debt incurred to acquire or substantially improve his or her residence. The Act largely left this rule in place, although the limit has been reduced from $1 million to $750,000 ($375,000 for a married person filing a separate return). This limitation change does not apply to indebtedness in place prior to December 15, 2017, or the subsequent refinancing of such indebtedness.

While the change in the limitation has gotten significant publicity, a second change is not as widely known even though it will impact many taxpayers. The home interest deduction used to be available for up to $100,000 in home equity loans. It did not matter what the loan proceeds were used for, the interest was deductible. For example, an individual could take out a home equity loan to purchase a car, take a trip, or finance a child’s college tuition, and the individual could claim a deduction for the interest expense. Unfortunately, the Act no longer allows a deduction on home equity loans except where the loan was part of the acquisition indebtedness for the home. So if you are considering using a home equity loan to finance expenditures unrelated to the acquisition or substantial improvement of your property, you may want to reconsider whether this is your best financing option given that the interest will no longer be deductible. Also, if you already took out a home equity loan for this type of expenditure, be aware that your loan is subject to this new rule and the interest is no longer deductible.

The good news is that these changes to the home interest deduction are for taxable years 2018 through 2025, and absent legislative action, the old rule will go back into effect in 2026.


Amanda

A member of the firm’s tax practice, Amanda Wilson concentrates on federal tax planning and structuring. She represents clients in a wide variety of complex federal tax matters with a particular emphasis on pass-through entities such as partnerships, S corporations and real estate investment trusts. Specifically, Amanda focuses on advising clients on the formation, operation, acquisition and restructuring of such pass-through entities. In addition, she regularly advises clients on the structuring and operation of private equity funds, real estate funds and timber funds. Amanda is the author of the Bloomberg Tax Management Portfolio 718-3rd Edition, Partnerships- Disposition of Partnership Interests or Partnership Business; Partnership Termination.

Amanda regularly works in structuring deals to benefit from tax advantaged structures, including like-kind exchanges, new market tax credits, low income housing tax credits, and qualified opportunity zones. Amanda also has extensive experience in corporate planning and international tax matters, as well as federal tax controversy. Her practice before the Internal Revenue Service (IRS) includes providing advice on audits and appeals, drafting protests and ruling requests, and negotiating settlements.

Prior to joining the firm, Amanda worked for Sutherland Asbill & Brennan LLP (now Eversheds Sutherland), an Am Law 100 firm in the Atlanta office, where she was part of Sutherland’s Tax Practice Group. Amanda has also served as an adjunct professor at Emory University School of Law where she taught Partnership Taxation.

Amanda regularly contributes to the firm’s Taxing Times blog and is a regular panelist on tax webinars hosted by Strafford Publications.

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