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New Tax Law: Is Interest Deductible on a Home Equity Line of Credit?

Wednesday, 06 June 2018 12:00
Image of 1040 Tax Form

A home equity line of credit (HELOC) or loan offers funding at rates that are typically much lower than other forms of credit. Changes to the tax law have generated questions about related tax deductions.

The Tax Cuts and Jobs Act of 2017 alters some popular real estate deductions available in 2018 and beyond. If you have a home equity line of credit or loan, you may still be able to deduct the interest you pay.  

Home Equity Deduction Change. If you draw money from your home equity line of credit or loan to “buy, build or substantially improve” the home that secures the loan, you can deduct the interest. However, if you use the funds to cover a personal expense – such as college tuition or to pay off debt – you cannot claim the tax deduction. 

Maximum Loan Amount. There is a limit on the overall mortgage/HELOC amount for tax purposes. Interest can be deducted on loans totaling up to $750,000 for a primary residence or a second home. Again, the funds must be used for buying, building or improving the property.

Example. Take a look at this scenario, courtesy of the IRS, to see how the HELOC deduction works.

“In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000.  In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.”

New Standard Deduction. As before, your total itemized deductions must exceed the standard deduction (in order to benefit from this deduction). For tax years 2018-2026, the new tax law raises the standard deduction considerably. The standard deduction is now $12,000 for the single filing status, and $24,000 for married, filing jointly. See standard deduction information from the IRS here (scroll to Section 3.14).

Reminder… A home equity line of credit or loan can be used for any purpose, and offers an attractive funding option for some homeowners. Just remember, the interest you pay on the loan may not be tax deductible. 

Consult a tax professional to understand the implications of the new tax law on your household’s federal income taxes. For more information about this topic, see the links below.