Your HELOC Might be Deductible, IRS Explains

This year’s income tax season is nearly at a close and many of us have already moved on to determining and tracking deductions for the 2018 tax year.

Mortgage and Home Equity loan interest tax guidelines will be changing but the general public’s initial knee-jerk reaction to these adjustments was largely premature. Fortunately the bottom line for the average homeowner will remain unchanged.

Mortgage Interest will still be deductible on loan amounts of up to $750,000, used to purchase or improve your primary residence or second home. This does not refer to your property’s value, rather it pertains to the actual remaining mortgage balance. In addition the old mortgage debt amount of $1,000,000 is grandfathered for an acquisition date before 12/16/17, or binding contract date prior to 12/16/17 along with a close date prior to 4/1/18. There are additional guidelines concerning property taxes so be sure to check with your accountant or tax preparer.

The new law regarding a HELOC, Home Equity Line of Credit, is also commonly misunderstood. Liz Dominguez of RIS Media explains below.

IRS Clarifies Home Equity Loan Tax Deductions

By Liz Dominguez

This year’s tax season is bringing to light taxpayer confusion surrounding The Tax Cuts and Jobs Act of 2017, which could impact homeowners in next year’s tax filing. The IRS is taking steps to clarify what the new provisions mean for the real estate industry and homeowners.

One of the most misunderstood provisions in the new tax law expires in 2026 and prohibits the deduction of interest paid on home equity lines of credit and home equity loans except when the funds are used to substantially improve the taxpayer’s home. The IRS recently issued a statement clarifying that the deduction has not been removed, but is instead available under new home improvement restrictions:

“…despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled,” according to an IRS release.

Homeowners must continue to meet the requirements of the previous law, which stated the loan must be secured by the taxpayer’s main or second residence, and the funds cannot surpass the cost of the home.

National Association of REALTORS® (NAR) President Elizabeth Mendenhall commended the IRS on its efforts to clarify how homeowners can take advantage of the HELOC tax provision.

“The National Association of REALTORS® is pleased with the IRS announcement clarifying and confirming that under the new tax law owners can continue to deduct the interest on a home equity loan, line of credit or second mortgage when the proceeds are used to substantially improve their residence,” said Mendenhall in a statement. “There has been much confusion on this issue, and the continued deductibility will bring real benefits to those who choose to take on remodeling projects to bring more resale value to their home or gain equity that may have been lost during the downturn.”

Randy Noel, chairman of the National Association of Home Builders NAHB), also supported keeping this provision within the new law.

“The National Association of Home Builders (NAHB) applauds [this] announcement by the IRS clarifying that households can take a tax deduction on a home equity loan or home equity line of credit if the loan is used for home improvements,” said Noel in a statement. “This is a major victory for remodelers and for homeowners who want to invest in their homes. NAHB has been pushing hard for this outcome since December, when The Tax Cuts and Jobs Act of 2017 was signed into law. We will continue to work with Congress and the Administration as they hammer out the details of the new tax law.”