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Jun-21-2019 23:35printcomments

Is Interest on HELOCs and Home Equity Loans Tax Deductible?

Tap into your home equity lenders advice on the topic as well.

tax deductions
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(SALEM, Ore.) - For homeowners who decide to borrow against the equity in their homes, either via a home equity line of credit (HELOC) or a home equity loan, it is possible to sometimes deduct the insurance expense on a federal tax return.

The laws have recently changed due to the legislation called the Tax Cuts and Jobs Act. In most cases, it's now harder to deduct loan interest than it used to be. The rules apply equally to HELOCs, home equity loans and interest paid on traditional mortgages. As far as deductions are concerned, homeowners should understand four key concepts about how the new IRS rules affect loan interest.

It's important, for example, to know the limits for deducting interest, what the rules are for how loan proceeds must be used, whether it even makes sense to deduct and which types of debt come with the highest interest rates.

There is plenty of information involved, so it's best to break it down into the four pertinent areas, as discussed below:

HELOC vs Home Equity Loan vs Primary Mortgage

As far as tax law is concerned, the type of loan interest doesn't make a difference, as long as the money you borrow uses your home as the primary source of collateral. That means you can, in certain cases, deduct regular mortgage interest, interest on HELOCs and interest on home equity loans.

The IRS allows you to deduct the full amount of the interest expense on your taxes as long as the property in question is your main residence or a secondary residence.

To Deduct or Not to Deduct?

Because the Tax Cuts and Jobs Act drastically changed the levels of the so-called "standard deduction," many homeowners will likely choose to take the standard deduction instead of itemizing.

For the huge majority of homeowners, it will usually make more sense to take advantage of the much higher standard deduction rather than itemize for the purpose of deducting interest expenses.

But for those who do choose to itemize, they'll have to be sure that their HELOC or home equity loan interest meets both the "limit test," and the "usage test." You may be able to tap into your home equity lenders advice on the topic as well.

The Limits of the Tax Deduction

The government's "limit test" refers to the amount of HELOC or home equity loan interest that you are allowed to take. There is a ceiling on the amounts based on your filing status and on when your loan originated.

The key date to remember is Dec. 15, 2017. If your loan originated before that date, you can deduct interest on debt amounts up to $1 million for married-filing-joint couples and up to $500,000 loans for most other filers. If the loan originated after that date, those amounts decrease to $750,000 and $375,000, respectively. Those numbers are the amounts of the loan, not the amount of the interest you can deduct.

The "Usage Test" for Deductions

The strict part of the new tax law pertains to the situations in which deductions for interest expense are allowed. Homeowners must use loan proceeds to "substantially renovate," purchase or build a primary or secondary home.

No longer is it legal to deduct interest when loan money is used for consolidating debt, paying for education or financing vacations. Substantial renovations must involve significant improvements that add to the value of a home.

Source: Special Features Dept.


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