Home Equity Interest - Deductible?

Published on Wednesday, May 9, 2018

For many taxpayers, Home Equity Loans and HELOCs, are useful financial tools for easily accessible cash at interest rates that are typically lower than most commercially available credit cards.  Due to their low interest rates, Home Equity Loans have been an enticing option for taxpayers looking to consolidate debt into a single, low cost payment, while also reaping additional beneficial tax treatment.

In previous years, similar to a home mortgage, any interest paid on a Home Equity Loan/HELOC during the current tax year was deductible up to a government-imposed limit. In 2017, interest paid on up to $100,000 of indebtedness could be deducted on Schedule A as an itemized deduction regardless of what those funds were used for. Many taxpayers used these loans for home improvements, educational expenses, or emergency funds. With the passing of the Tax Cuts and Jobs Act of 2017, many of our clients faced concern over whether or not interest paid on their Home Equity Loans/HELOC’s would continue to enjoy tax deductible treatment, and rightfully so. As the end of the year approached, there were articles claiming The Home Equity Loan Interest Deduction is Dead, and according to forbes.com Borrowers Lose Home Equity Tax Deduction.

However, on February 21st the IRS clarified that, in many cases, taxpayers can continue to deduct interest on their home equity loans. In order for the interest paid to qualify to be itemized, you must meet ALL of the following criteria:

1)      The loan must be secured by the taxpayer’s main or second home

2)      The loan MUST be used to buy, build, or substantially improve the home that secures the loan

3)      The deductible interest is limited to amounts paid on indebtedness of $750,000, between the mortgage on the home, plus the Home Equity Loan/HELOC,

4)      The sum of both loans may not exceed the cost of the home, plus substantial improvements