Are Home Equity Loans Tax Deductible in 2018?
If you're a homeowner considering a home equity loan, one of the questions you might have is whether the interest you pay on that loan is tax-deductible. The short answer is: it depends. Let's dive into the details to help you understand the tax implications of home equity loans.
Understanding the Tax Cuts and Jobs Act
In 2017, the Tax Cuts and Jobs Act (TCJA) brought significant changes to the tax rules surrounding home equity loans and home equity lines of credit (HELOCs). Prior to the TCJA, homeowners could deduct the interest paid on home equity loans and HELOCs, regardless of how they used the borrowed funds.
However, under the new tax law, the deductibility of home equity loan interest is now limited to situations where the loan proceeds are used to "buy, build or substantially improve" the home that secures the loan.
Qualifying for the Home Equity Loan Interest Deduction
To qualify for the home equity loan interest deduction, you must meet the following criteria:
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Loan Purpose: The borrowed funds must be used to buy, build, or substantially improve the home that secures the loan. This includes renovations, additions, or major repairs that increase the home's value or prolong its useful life.
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Debt Limit: The total amount of your home equity debt, combined with your acquisition debt (such as a mortgage used to buy or build your home), cannot exceed $750,000 for married couples filing jointly or $375,000 for single filers. This limit applies to loans taken out after December 15, 2017.
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Itemized Deductions: You must itemize your deductions on your tax return to claim the home equity loan interest deduction. If you take the standard deduction, you cannot deduct the interest.
Examples of Qualifying and Non-qualifying Uses
To better understand the rules, let's look at some examples:
Qualifying Uses:
- Adding a new room or finishing a basement
- Replacing the roof or windows
- Installing a new HVAC system
- Building a swimming pool or deck
Non-qualifying Uses:
- Paying off credit card debt
- Financing a vacation or other personal expenses
- Purchasing a car or other assets not related to the home
In the non-qualifying scenarios, the interest paid on the home equity loan is not tax-deductible.
Keeping Accurate Records
If you plan to claim the home equity loan interest deduction, it's crucial to keep detailed records of how you spent the borrowed funds. This includes receipts, invoices, and other documentation that proves the money was used for eligible home improvements.
Seeking Professional Advice
The tax rules surrounding home equity loans can be complex, and individual circumstances may vary. If you're unsure about your eligibility for the deduction or have any other tax-related questions, it's best to consult a qualified tax professional or financial advisor.
Conclusion
In summary, the Tax Cuts and Jobs Act of 2017 introduced significant changes to the tax deductibility of home equity loans and HELOCs. While the interest may still be deductible in certain circumstances, it's essential to understand the qualifying criteria and maintain accurate records. By staying informed and seeking professional guidance when needed, you can make informed decisions about your home equity loans and maximize your tax benefits.