HELOC INTEREST DEDUCTION
First They Say You Can’t … and Now They Say You Can … Maybe!
The Tax Cuts and Jobs Act (TCJA) passed in the closing days of last year, was apparently quite clear about the treatment of interest paid on home equity lines of credit (HELOC) … its tax deductible status was killed beginning with the 2018 tax year.
As a result of “many questions by taxpayers and tax professionals” the IRS has clarified that all interest deductions on HELOCs are not history. That clarification boils down to deductions may be permitted for home equity loans used for home improvement purposes. In the words of the IRS, taxpayers may “often still deduct interest on a home equity line of credit or second mortgage, regardless of how the loan is labeled when used to buy, build or substantially improve the taxpayer’s home that secures the loan.”
As you may expect there are limitations. The total debt on the house must be within statutory limits, i.e. the combined debt of the first mortgage and HELOC may not exceed $750,000 for joint filers and $375,000 for those filing separately.
Do This to Retain Deduction: Let’s assume your initial first mortgage when you bought your home was $350,000. In 2018, you take out a HELOC in the amount of $75,000. If you use the money to remodel your kitchen, add a deck or renovate your master bath, all of the interest is deductible.
Don’t Do These Things: In its policy statement on this issue, the IRS offers examples of what you may not do with your HELOC and still deduct the interest:
- Pay off credit card bills and other personal debts;
- Student loans;
- Auto purchases;
- Vacation travel expenses; and
- Home furnishings.
So there are no restrictions on how you use proceeds from a HELOC … just specific guidelines that say to retain the interest deduction it must be used for purposes of home improvement. So let’s say you borrow $75,000 as a HELOC in 2018. You use $50,000 for home improvements and $25,000 to pay off student loans … interest on the $50,000 is still deductible; interest on the $25,000 applied to student debt is not.
Click here to read the full IRS text.
Alternatively … give us a call or drop an email and let’s talk about how the new law may affect your specific circumstances. Pearson & Co. … always ready to respond promptly and help!