Yes, you can only deduct the interest on the portion of the mortgage loan or line of credit that was used to buy, build or substantially improve your home. This is a new requirement for tax years 2018 through 2025.
You cannot deduct the amount of interest attributed to the amount of the loan used to pay off your credit card and car loan.
The Tax Cuts and Jobs Act of 2018 changed both the type of mortgage interest that can be deducted as well as the amount of interest that can be deducted.
Acquisition Debt vs. Equity Debt
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Acquisition Debt is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and must be secured by the taxpayer's residence.
Equity Debt is all other debt secured by the taxpayer's residence, such as home equity proceeds that are used to pay off credit card debt, purchase a vehicle, take a vacation, etc.
Under the TCJA, all equity debt is non-deductible, even if incurred prior to December 15, 2017. However, if the proceeds from home equity debt are used to buy, build, or substantially improve the property that secures the debt, the debt can be considered acquisition debt. Acquisition debt is deductible, but different rules apply depending on the date it was incurred.
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