Home Equity Loans Tax Deductible – Many taxpayers fear the new tax law — the Tax Cuts and Jobs Act of 2017, enacted in December — is the death knell for the interest deduction from home equity loans and lines of credit. The loan is based on the equity in your home and is secured by the property. (Home equity is the difference between what the home is worth and what you owe on your mortgage.)
But the Internal Revenue Service recently issued an advisory saying it was responding to “many questions from taxpayers and tax professionals.” According to the advisory, the new tax law suspends the deduction for home equity interest from 2018 to 2026 — unless the loan is used to “purchase, build or substantially improve” the home securing the loan.
Home Equity Loans Tax Deductible
If you take out a loan to pay for something like an addition, new roof, or kitchen renovation, you can still deduct the interest.
New Tax Law & Home Equity Loan Interest Deductions
But if you use the money to pay off credit card debt or student loans — or take a vacation — the interest is no longer deductible.
(As was already the case, the I.R.S. said, the loan must be secured by your primary home or a second home and not exceed the cost of the home to qualify for the interest deduction.)
I.R.S. It also noted that the new law sets a lower dollar limit for all mortgages that qualify for the interest deduction. Beginning this year, taxpayers can deduct interest on home loans up to $750,000. The limit applies to the combined loan amount used to purchase, build, or improve the taxpayer’s principal home and second home.
Say a taxpayer took out a $500,000 mortgage in January 2018 to buy a home valued at $800,000. The following month the taxpayer took out a $250,000 home equity loan to build an addition on the home. “Because the total amount of the two loans does not exceed $750,000,” the I.R.S. “All interest paid on the loan is deductible,” he said. But if the taxpayer used the loan for “personal” expenses, such as paying off student loans or credit cards, the interest is not deductible.
Home Equity Loan Vs. Heloc: What’s The Difference?
Often, homeowners take out loans against their home equity because the interest rates are generally lower than other types of loans. A home equity loan works like a traditional second mortgage: it’s borrowed at a fixed rate for a specific period of time. A home equity line of credit is more complicated: an initial draw period — usually 10 years — with fluctuating interest rates that borrowers can draw on as needed. After that, the balance is usually converted into a fixed rate loan.
A recent survey for TD Bank, an active home equity lender, found that the top use for home equity loans (32 percent) is renovation, followed by emergency funds (14 percent) and education expenses (12 percent).
Mike Kinane, TD Bank’s head of consumer lending, said the bank saw a “slight slowdown” in applications and a slight increase in borrowers paying off large lines of credit before the IRS. Explanation. But, he said, home equity options exist for homeowners to borrow large sums of money at competitive rates. “It’s still going to be a great borrowing tool for consumers,” he said.
No. The rules apply to returns you file for next year, 2018, said Carrie Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants. Interest on home equity loans or lines of credit you paid in 2017 is generally deductible on the return you file this year, regardless of how you used the loan. But, she said, the interest may not be deductible on next year’s tax return — depending on how you spent the money.
Home Equity Loan: A Simplified Guide To Borrowing Home Equity
Yes. You can use all or part of the loan for personal expenses. You can’t take the interest-only deduction for the amount used for those purposes, Ms. Weston said.
It is the I.R.S. A new form will be created to go with the interest deduction, and taxpayers will specify the purpose of the loan, said Patrick Colabella, assistant professor of accounting and taxation at St. John’s University. Still, it’s advisable to keep records and receipts for your home improvement project, he said, if you ever need to justify an interest deduction to the I.R.S.
A version of this article appears in print in the New York edition, Section B, page 3: Interest on home equity loans is still deductible, but with a big caveat. Order Reprints | Today’s Paper | Contribute Yes, the interest paid on a home equity loan or HELOC is deductible if you used the loan to buy, build, or improve the home you used to get the loan.
When you own real estate, home equity loans and home equity loans (HELOCs) are effective tools for turning the equity you’ve built up in real estate into liquid cash. In the past, the interest you paid on these loans was tax deductible up to a certain limit.
Mortgages Vs. Home Equity Loans: What’s The Difference?
But in 2017, the IRS changed the rules on writing off home equity loans. Now, fewer people and different types of debt are eligible to deduct interest on home equity loans on their income taxes.
Congress passed the Tax Cuts and Jobs Act (TCJA) on December 16, 2017, changing the rules for deducting interest on a home equity loan.
These rules apply to first and second mortgage loans on a primary or second home. However, there are different restrictions on home equity loans opened after the TCJA.
If you took out a home equity loan after the passage of the TCJA (December 16, 2017), you can deduct:
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The tax deduction for interest on a home equity loan or HELOC depends on how you spend the loan funds. Interest on home equity loans and HELOCs is deductible only if you use the funds to “purchase, build, or substantially improve” the home to which the loan is attached.
This applies to interest on both new loans and loans that existed prior to the passage of the TCJA.
Let’s say you and your spouse borrow $400,000 to buy a home in 2019. In 2020, suppose you took out a $100,000 home equity loan to renovate the kitchen and buy new furniture. Because it doesn’t fall under “home purchase, construction, or improvement,” you can only deduct the interest on the portion of the loan used for the renovation, not the furniture expenses.
All that said, the TCJA significantly increased the standard deduction, making it pointless for many homeowners to itemize their home equity and HELOC tax deductions. In 2023, the standard deduction is $13,850 for single filers and $25,900 for married couples filing jointly. Unless you’ve taken out a very large home equity loan or HELOC, it’s unlikely that you’ve spent more than $25,900 (or $13,850) in interest in a fiscal year.
Closing Costs That Are (and Aren’t) Tax Deductible
If you still want to claim a home equity loan, you must itemize deductions using IRS Form 1040. Again, you should only do so if your deductible expenses, including mortgage interest payments and qualified home equity loan interest payments, add up to more than that. Standard deduction of $13,850 or $25,900.
The IRS wants proof of everything. So, if you want to claim an interest deduction, you’ll need your mortgage statements to confirm how much you borrowed. You will need receipts, contracts and any other documents to prove that you used the funds to buy, build or improve the home you used as collateral for the loan.
Before tax season, you should also receive IRS Form 1098 from your lender. This mortgage interest statement will tell you exactly how much interest was paid on your mortgage, home equity loan, or HELOC during the tax year. If you don’t receive it, contact your lender.
This is where things get confusing. The US tax code is so complex that many people only take the standard deduction. To determine your income tax deductions, you must add up all allowable payments throughout the year for which you have documentation. You can include property taxes and mortgages on your primary residence.
Home Equity Loan Vs. Line Of Credit
If you have a new mortgage and you bought mortgage points to lower your interest rate or as an underwriting fee to your lender, you may be able to include them in your total deduction. Mortgage points count as prepaid mortgage interest, allowing you to deduct them if the loan is for your primary residence and paying mortgage points is normal business practice in your area.
Factoring in mortgage points can get you closer to beating the standard deduction, but it’s tricky. Consult with your mortgage originator and/or tax advisor to help you determine your specific situation.
Finally, when you have an idea of your total tax deductible amount, you should choose to file with a standard or itemized deduction. A lot of leg work to get this
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