Can you still deduct interest from your Home Equity Line of Credit (“HELOC”)?

November 12, 2018

You may have heard that your Home Equity Line of Credit (“HELOC”) interest is no longer tax deductible on your individual income tax return. Although the tax law specifically states that HELOC interest is no longer tax deductible, there are certain situations in which you can still deduct the interest from your HELOC on your individual income tax return. Under the old tax law, a taxpayer could itemize the interest for regular income tax purposes on the first $100,000 of home equity indebtedness. It did not matter what the home equity debt was used for, the HELOC interest was tax deductible. This provision has been removed under the 2017 Tax Cuts and Jobs Act (“2017 TCJA”). The determination of the deductibility of the HELOC interest depends on several factors.

HELOC Interest as an Itemized Deduction

The general rule now is HELOC interest cannot be included as an itemized deduction unless the HELOC proceeds were used to buy or improve your home. The amount of HELOC interest that can be deducted, also depends on how much total home indebtedness you have. The 2017 TCJA lowered the dollar limit on mortgages qualifying for the home mortgage interest deduction. Taxpayers incurring home acquisition indebtedness after December 15, 2017 can only deduct interest on $750,000 of home loans (reduced from $1 million). The HELOC interest deduction is no longer available, unless the loan is used to substantially improve your home and your total home debt is under the $750,000 cap.

Home Acquisition and Home Improvement Cost Examples

For example, if you bought your home in 2016 for $500,000 and also used a $100,000 HELOC to make improvements to your home, all of the interest from your HELOC is still tax deductible. However, if you used the $100,000 from your HELOC to pay off credit card bills and other personal loans, the interest from your HELOC will not be deductible on your 2018 individual income tax return. Further, if you bought your home in 2016 for $750,000 and then in June of 2018 you remodeled your kitchen and took out a HELOC for $80,000, the interest on the $80,000 HELOC is not tax deductible. Since the HELOC loan was taken out after the upper bound limit was reduced to $750,000, the interest on the HELOC is not tax deductible since your total home indebtedness exceeded $750,000.

Vacation Home Examples

Lastly, if in 2018 you took out a $500,000 mortgage loan to purchase a new home and used the home to secure the loan the interest from this loan is fully deductible on your 2018 individual income tax return. However, if later in the year, you take out a second loan (i.e. home equity loan) to purchase a vacation home worth $250,000 and used your main home as collateral, the interest from your home equity loan is not deductible since you did not use the home equity loan for improvements to the collateralized home. If you purchase a vacation loan with a loan collateralized by the vacation home and your total home debt does not exceed $750,000, you can deduct all of the interest paid on both mortgages.

Answers to Tax Questions

Overall, the 2017 Tax Cuts and Jobs Act is very complex, but it is important to remember the general rule that only interest paid on loans to purchase or improve a home is tax deductible. If you have any other questions or would like to know more about how the 2017 TCJA may affect your personal tax situation, please do not hesitate to contact a Hoffman Clark consultant.

Sources:

CCH