What you can write off (and what not).

Do you have a home equity loan or line of credit (HELOC)? Homeowners often use their home equity for a quick buck and use their property as collateral. But before you do that, you need to understand how that debt will be handled in the coming tax season.

With the Tax Cuts and Employment Act of 2018, home equity rules have changed dramatically. Here’s what you need to know about home equity taxes if you’re applying this year.

Purchase Debt vs. Home Equity Debt: What’s the Difference?

For starters, it’s important to understand “buyer debt” versus “home equity debt.”


“Acquisition debt is a loan to buy, build or improve a primary or secondary residence and is secured by the home,” it says Amy JucoskiCertified Financial Planner and National Planning Manager at Abbot Downing.

That phrase “buy, build, or improve” is key. Most original mortgages are purchaser debt because you’re using the money to buy a home. However, money used to build or renovate your home is also considered a debt as it is likely to increase the value of your property.

However, home equity is different.

“If the proceeds are used for something other than buying, building or substantially improving a house,” says Jucoski.

For example, if you took out a loan against your home to pay for college, a wedding, a vacation, a budding business, or something else, then that counts as home equity.

This distinction is important to understand, especially since you may have a home equity loan, or HELOC not considered home equity debt, at least in the eyes of the IRS.

If your home equity loan or HELOC is used to snorkel in Cancun or open an art gallery, then it is home equity. However, if you’re using your home equity loan or HELOC to renovate your kitchen or add a half-bathtub to your home, then that’s debt.

And as of now, Uncle Sam is far kinder to purchase debt than home equity used for non-real estate purposes.


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Watch: 5 Tax Benefits of Homeownership: A Guide to Filing This Year

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Interest on home equity is no longer tax deductible

Under the old tax rules, you could deduct interest on up to $100,000 in home equity debt as long as your total mortgage debt was less than $1 million. But now it’s a whole different world.

“Home equity debt interest is no longer deductible,” it said William L Hughes, a chartered accountant in Stuart, FL. Even if you have taken out the loan In front With the new tax law, you can no longer deduct interest on home equity debt.

This new tax rule applies to Everyone Home equity debt as well as cash out refinancing. There, you replace your main mortgage with a whole new one, but take some of the money out as cash.

Suppose you initially borrowed $300,000 to buy a house and then repaid it to $200,000 over time. Then you decide to refinance your $250,000 loan and take that extra $50,000 to help your child pay for grad school. The $50,000 you borrowed to pay tuition is home equity — and that means the interest on it isn’t tax-deductible.

Limits of the tax-deductible acquisition debt

Meanwhile, construction debt used to purchase, build, or improve a home remains deductible, but only up to a certain limit. Any new loan borrowed beginning December 15, 2017—whether it’s a mortgage, home loan, HELOC, or refinance with a payout—is subject to the new $750,000 mortgage interest deduction floor.

Even if your only goal is to buy, build, or improve a property, there are limits to how much the IRS will get involved.

When in doubt, be sure to consult an accountant who will help you navigate the new tax regulations.

The post Home Equity Loan Tax Deductions and HELOCs: What You Can (and Can’t) Write Off appeared first on Real Estate News & Insights | realtor.com®.

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