Have you taken out a home equity loan? It’s a great way to fund home improvement or renovation projects if you don’t have the cash to do them otherwise. When it comes time to pay taxes, you may even be able to deduct the interest you pay on the loan. Or maybe not. It’s complicated.
First of all, let’s talk about the two different types of home equity lending. A home equity loan is a fixed rate loan that provides an amount of money specified before the loan is executed. A home equity line of credit (HELOC) has a variable rate. A HELOC is a revolving line of credit with a house as collateral. A homeowner with a HELOC can draw on this line of credit for a specified amount of time, typically 10 years. As with a credit card, the available credit is replenished as it’s repaid, allowing the homeowner to continue to borrow against it throughout the specified time frame. With both types of home equity lending, the interest is sometimes tax-deductible.
WHY ONLY SOMETIMES?
It has to do with changes to the tax law in 2017. Prior to that point, homeowners could take a tax deduction for the interest they’d paid on a home equity loan or HELOC, regardless of how that money was spent. In other words, whether you wanted to borrow against your house to pay off credit cards, go back to school, or finish your basement, it was all the same in terms of taxes. As of 2017, however, only funds used to “buy, build, or substantially improve” the home you’re borrowing against are tax deductible.
What’s more, while there was previously a limit of $1 million worth of loans eligible for interest deduction ($500,000 for a married taxpayer filing a separate return), that limit has dropped. Now homeowners can only deduct the interest on $750,000 or less of residential loans ($375,000 for those who are married filing separately). This includes not only a home equity loan or HELOC but encompasses the mortgage interest deduction as well. These changes to the tax law are in effect until at least 2025.
When all is said and done, it may not be beneficial to deduct the interest from a home equity loan, because the standard deductions changed in 2017 as well. The current standard deductions are $24,800 for married couples filing jointly, $12,400 for single filers or married taxpayers filing separately, and $18,650 for head of household. Unless your deductions would amount to more than that, it’s probably not worth it to itemize.
At First Coast Mortgage Funding, we offer creative solutions to help borrowers improve credit and overcome roadblocks when trying to secure home financing. Committed to helping people in the First Coast region buy and refinance residential properties, we specialize in every kind of property, working to provide home loans to our clients at the lowest interest rates, with the best possible service. Contact us through our website or call 904.770.5000 for more information.