Is Home Equity Interest Still Deductible?

This article appeared in the Summer 2018 edition of the Mountain America Credit Union Newsletter

Home equity is the appraised value of a home, minus what the homeowner still owes. This value will determine what kind of home equity loan or home equity line of credit you are able to secure. When tax reforms were passed in 2017, many taxpayers and tax professionals worried that new restrictions would effectively end deductions for home equity loans, home equity lines of credit (HELOCs) and second mortgages. Now, the IRS is saying interest paid on home equity debt may still be tax deductible, at least in some cases.

With all of these changes, you may find yourself pondering a few questions—Are home equity loans tax deductible? Is HELOC interest tax deductible? Is home equity loan interest tax deductible? In the end, it comes down to two points. Let’s dive into the details to find a deeper understanding.

1. How you use the money—The first point to consider is how you’re planning on using the money. The funds acquired from home equity loans, HELOC tax deductions and second mortgages must be used to purchase, build or substantially improve the primary or secondary home that secures the loan.

   In other words, if you pay for things like an addition on your house, a newly updated roof or kitchen renovation, you still have the opportunity to deduct the interest. However, if you use the money to consolidate credit card debt or take a vacation, the interest is no longer deductible because it wasn't used for the house.

2. How much home debt you accrue—The second point to consider is how much home debt you've accrued. As of January 1, 2018, taxpayers are limited to an interest deduction on $750,000 of qualified residence loans, down from $1 million. This limit applies to the combined total of loans used to buy, build or improve the taxpayer’s main home and second home. So, as long as the combined total of the loans you take out on your home do not exceed $750,000, you’ll be just fine.

   Here's a quick example: In January 2018, a taxpayer takes out a $500,000 mortgage to buy a main home valued at $800,000. Later that year, the taxpayer gets a $250,000 home equity loan to build an addition on the home. Both loans are secured by the main home, and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all interest paid is deductible.

What if you don’t meet the new requirements?

So what do you do if you don’t meet these new requirements for home interest deductions? Don’t worry—there may be other loans that you qualify for that are tax deductible. Find an option that works for you and your specific needs.

It doesn't have to be complicated or intimidating. Meet with a Mountain America mortgage specialist to determine which home financing options are best for your circumstances and start things rolling on your dream home. Call 1-800-277-7703 to schedule an appointment.

Mountain America Credit Union does not provide tax, legal or accounting advice. This material has been prepared for informational purposes. You should consult your own tax, legal and accounting advisors before engaging in any transaction.