Here is what people thought the TCJA said: For tax years beginning after Dec. 31, 2017, and before January 1, 2026, there is no longer a deduction for interest on “home equity debt.” The elimination of the deduction for interest on home equity debt applies regardless of when the home equity debt was incurred.
Oops! That’s not quite right! In IR 2018-32, the IRS said that despite the newly enacted restrictions on home mortgages under the TCJA, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC), or second mortgage, regardless of how the loan is labeled. The IRS clarified that the TCJA suspends the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build, or substantially improve the taxpayer's home that secures the loan. Thus, interest on a home equity loan on a taxpayer's main home used to purchase, build, or improve a vacation home is not deductible.
For example, interest on a home equity loan used to renovate or 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. As under pre-TCJA law, for the interest to be deductible, the loan must be secured by the taxpayer's main home or second home (known as a qualified residence), must not exceed the cost of the home, and must meet other requirements.