Find Out Whether Your Home Equity Loan Interest Is Deductible or Not

Find Out Whether Your Home Equity Loan Interest Is Deductible or Not

The Tax Cuts and Jobs Act of 2017 which was enacted in December were feared by many taxpayers. They thought that this was the end of deducting interest from home equity loans and lines of credit. Homeowners tend to borrow against their home equity because the interest rates are typically lower than other types of credit. Therefore homeowners prefer home equity loans more.

The loans are based on the equity of the house and are guaranteed by the property. Home equity can be defined as the difference between the actual worth of the house and the amount you owe on your mortgage. 

Many homeowners were confused about the new GOP whether they would still be able to deduct the Home Equity Line of Credit (HELOC) interest anymore. To reduce the confusion by homeowners, the IRS issued an advisory. We can get some of the details from the advisory about what will be deductible and what will not. The advisory states that you will not be able to deduct HELOCs for the tax years 2018-2025. However, there are few exceptions. If you intend on taking this deduction, your loan must be extensively used to “buy, build or substantially improve” the house that secures the loan.

What does or does not qualify for the deduction?

If you are using the loan to complete some work on your home, the advisory states that you can still deduct the interest through the HELOC. For example, things like reinstalling of the roof, fixing solar panels or remodeling of the kitchen or bathroom or any kind of substantial improvement of the house qualify for a HELOC.

According to the advisory, the furniture and any kind of artwork cannot be used for obtaining a HELOC.

Similarly, if you are planning to use your house as a cash-box to subsidize your personal lifestyle, you will not be able to subtract the interest through a HELOC. Even expenses like paying for your child’s education cannot be deducted through HELOC. You have to remember that in the end, what you utilized the money for is up to you to decide. Whether or not to decide what use is deductible through HELOC is up to the IRS.

Limits to Home Equity Loan Amounts

Normally, homeowners can deduct interest the paid on HELOC debt up to $100,000. But you have to be aware that the HELOC deduction is restricted only to the original purchase price of the house. For example, even though you bought a home for $75,000 and then execute modifications or repairs worth several thousand into it, you would only be able to deduct interest paid up to $75,000 if using a HELOC.
It is also worth noting that the new tax plan decreases the dollar limits on traditional mortgages. In the start of 2018, taxpayers may subtract interest of $750,000 in home loans. This valid only to homes bought as of December 16th, 2017. The homeowners who bought their homes before that date can still deduct up to $1 million in principal mortgage debt.

Another important thing to be mindful of is the fact that the $750,000 limit be valid to the combined total of all debt on all properties owned. Suppose you have a $600,000 mortgage on one of your residence and owe $150,000 on another, the entire amount gets a tax break. But if your primary residence is $750,000 and your secondary home is $450,000, you would only get a tax break only on $750,000 and the paid interest on $450,000 would not be deductible through HELOC.

Two singles could potentially deduct a total of $1.5 million in mortgage debt (as $750,000 each) if they purchase the home together. However, a married couple would be limited to $750,000.

In order to prove that money was spent for eligible purposes, taxpayers should keep all the records and receipts. It may be or maybe not that the IRS will initiate a new form to go with the interest deduction, on which taxpayers will state the purpose of the loan. But it is always wise to retain all the necessary documents as proof of house improvement or purchase.

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