The Tax Cut and Jobs Act changed the way taxpayers take deductions. What used to be a common deduction became obsolete. Many of these changes had to do with the mortgage industry. Suddenly it wasn’t a given that you could deduct your mortgage interest. So where does that leave home improvement loans? Are you able to deduct their interest on your taxes?
Keep reading to find out.
The Maximum Deduction
The IRS put in place strict maximum loan amounts. What used to be a $1 million dollar cap for married couples filing jointly and a $500,000 cap for married couples filing separately, is now a $750,000 and $375,000 cap respectively.
To be clear, the maximum loan amounts are a combined loan amount maximum. In other words, your first mortgage plus any home equity loans creates the maximum. For example, if you have a $500,000 first mortgage and a $250,000 home equity loan, you would meet the $750,000 maximum.
When Can you Deduct Home Improvement Loans?
Home equity loans, sometimes called home improvement loans, are a part of the interest you can deduct. But, there’s a catch. You must use the loan to buy, build, or improve your home in order to use it for tax deductions. If you take out a home equity loan for personal use, such as to consolidate debt or pay for an education, you can’t deduct the interest.
The IRS drew a fine line in the sand when determining the definition of a ‘substantial improvement.’ In short, the improvement must add value, enhance the life of the home, or give them home more use (such as an addition). This means cosmetic changes to a home may not qualify for the interest deduction. For example, painting a home doesn’t qualify, but fixing a leaking roof would count.
Who Can Deduct the Interest on a Home Improvement Loan?
As a part of the Tax Cut and Jobs Act, the taxpayers eligible for itemized deductions have changed. The standard deduction increased to $12,000 for single filers and $24,000 for married filing jointly filers. This makes it more difficult for many people to qualify for itemized deductions.
The Other Home Related Tax Deductions
If you have more deductions than the standard amount allowed, you may also want to consider the following home-related deductions:
- Interest on your first mortgage – As long as you are below the $750,000 combined total with your first and second mortgage, you can deduct the interest on your first mortgage along with the home improvement loans’ interest.
- Points – If you paid discount points to get a lower interest rate, you may be able to deduct them on your taxes. Talk with your tax advisor about whether you should deduct the points all at once or over the loan’s lifetime.
- Real estate taxes – With the Tax Cut and Jobs Act, you can deduct up to the first $10,000 you pay in property taxes on your primary home.
You may be eligible to deduct the interest you pay on your home improvement loan. Find out if you are eligible by talking to your tax advisor. The tax laws continually change, but as of right now, deducting the interest on your second mortgage may be possible.Click to See the Latest Mortgage Rates»