As home prices continue to appreciate, homeowners continue to build equity. In 2017, American homeowners’ home equity hit a record $14.1 trillion. With growing home equity, some homeowners may be considering home equity loans or home equity lines of credit (HELOC). Following the release of the Tax Cuts and Jobs Act of 2017, some homeowners are unclear about whether or not their interest is tax deductible. The Internal Revenue Service (IRS) recently weighed in on the issue to clarify what is and is not still deductible.
The IRS explained taxpayers can “still deduct interest on a home equity loan, home equity line of credit or second mortgage, regardless of how the loan is labeled,” provided the borrowed funds are used to, “buy, build or substantially improve the taxpayer’s home that secures the loan.”
Although only funds used toward improving the home are tax deductible, not all HELOC funds have to be reinvested in the home. For example, a homeowner with a $300,000 first mortgage chooses to borrow $100,000 via a HELOC. They put $80,000 toward a new roof and plumbing upgrades and use the remaining $20,000 toward paying off debt. According to the IRS, the homeowner can still write off interest on the $80,000 toward home improvements. Homeowners who use home equity to pay for student loans debt, credit cards, vehicles, vacations, home furnishings, or other expenses will not be able to write off these purchases.
According to the IRS:
The amount of the first mortgage on the property, combined with the home equity or HELOC debt, cannot exceed $750,000, the newly revised limit for mortgage interest deductions by taxpayers filing joint returns; married owners filing separately have a new ceiling of $375,000. Previously, the limits were $1 million and $500,000.
With home prices rising and home equity continuing to grow, many homeowners may consider a home equity loan or HELOC. Before taking out a home equity loan or HELOC it is best to consult a mortgage professional or financial advisor to review your decision.