What you can (and can’t) write off

Do you have a home equity loan or home equity line of credit (HELOC)? Homeowners often tap into their home’s equity for quick cash, using their property as collateral. But before that, you need to understand how this debt will be handled come tax season.

With the Tax Cuts and Jobs Act of 2018, the rules for home equity debt have changed dramatically. Here’s what you need to know about home equity loan taxes when you file this year.

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

To begin with, it is important to understand “acquisition debt” versus “home equity debt”.

“Acquisition debt is a loan to to buybuild or improve a primary or secondary residence, and is secured by the house,” says Amy JucoskiCertified Financial Planner and Head of National Planning at Abbot Downing.

This phrase “buy, build or improve” is essential. Most original mortgages are acquisition debt, because you use the money to buy a house. But the money used to build or renovate your house is also considered acquisition debt because it will likely increase the value of your property.

Home equity debt, however, is something different.

“It’s if the product is used for something other than buying, building or significantly improving a home,” says Jucoski.

For example, if you borrowed against your home to pay for college, a wedding, a vacation, a start-up business, or anything else, that counts as home equity debt.

This distinction is important to be clear, especially since you might have a home equity loan or HELOC that is do not considered home equity debt, at least in the eyes of the IRS.

If your home equity loan or HELOC is used to go snorkeling in Cancun or open an art gallery, then it is home equity debt. However, if you are using your home equity loan or HELOC to remodel your kitchen or add a half bath to your house, then it’s an acquisition debt.

And as of now, Uncle Sam is much more supportive of acquisition debt than equity debt in a home used for non-ownership activities.



Watch: 5 Tax Benefits of Owning a Home: A Guide to Filing This Year


Interest on home equity is no longer tax deductible

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

“Interest on home equity debt is no longer deductible,” says William L. Hughes, a certified public accountant in Stuart, FL. Even if you took out the loan before the new tax bill adopted, you can no longer deduct any amount of interest on the net debt of the house.

This new tax rule applies to all home equity debt, as well as cash refinance. This is where you replace your main mortgage with a brand new one, but withdraw some of the money in cash.

For example, suppose you initially borrowed $300,000 to buy a house, then paid it back over time to $200,000. Then you decide to refinance your loan for $250,000 and take that extra $50,000 to help your child pay for college. The $50,000 you withdrew to pay tuition is home equity debt, which means the interest is not tax deductible.

Limits on tax-deductible acquisition debt

Meanwhile, acquisition debt used to buy, build, or improve a home remains deductible, but only up to a certain limit. Any new loans taken on or after December 15, 2017, whether mortgages, home equity loans, HELOCs, or cash refinances, are subject to the new lower limit. $750,000 for the mortgage interest deduction.

So even if your only goal is to buy, build, or improve a property, there are limits to IRS investment.

If in doubt, be sure to consult a an accountant to help you navigate the new tax rules.

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