NEW YORK (CNNMoney) - The new federal tax law created a lot of confusion over whether tax filers may still deduct the interest they pay on their home equity loans and home equity lines of credit.
The new law suspends the deduction for interest on home equity indebtedness for the next eight years.
But it turns out the suspension does not apply to all home equity loans (HELs) and lines of credit (HELOCs).
It just applies to those that are used to pay for non-home-related things, like paying off your credit card or buying a car.
But you can still deduct home equity loan interest that is used to pay for home improvements.
Until this year, you had been allowed to deduct the interest you paid on up to $100,000 in HELs and HELOCs, regardless of how you used the money.
To clear up the confusion the IRS recently issued some clarifying guidance to let people know that in many cases you may continue to deduct the interest you pay when you borrow against your home equity.
Here's the deal:
Despite their names, home equity loans and home equity lines of credit are not considered "home equity indebtedness" under the law when they're used for "acquiring, constructing or improving" your primary residence and are secured by your home.
Indeed, when the money is used to build or improve your home, the loans are considered "acquisition debt" like the mortgage you got to buy your house.
And the new tax law still allows you to deduct the interest you pay on acquisition debt.
But it does limit that deduction going forward.
For loans taken out between now and Dec. 31, 2025, after which the suspension ends, you may only deduct the interest you pay on up to $750,000 of acquisition debt. That limit applies to your mortgage and home equity loans or lines of credit combined.
So if you go out tomorrow and get a $750,000 mortgage then a few months later take out a $100,000 HEL to build an addition and replace your roof, you may only deduct the interest on your total debt up to $750,000.
If, however, you had taken out that same mortgage and HEL on or before Dec. 15, 2017, the applicable limit for acquisition indebtedness is $1 million, so you could deduct all your interest.
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