What If I Took Out A Home Equity Loan Before The Tax Cuts And Jobs Act Went Into Effect
If you took out a home equity loan before the TCJA kicked in, youll have a higher limitation of $1 million .
These old limits also apply to any mortgage debt refinanced after the TCJA, assuming you incurred the original debt before the TCJA kicked in. For instance, if you took out a home equity loan in 2015, and you refinanced it today, you would still qualify for the higher pre-TCJA limit. You just cant claim the higher limit on any additional debt .
Good to know:
Learn the Difference: Home Equity Loan vs. Home Equity Line of Credit
Home Equity Loans Basics
Home equity loans use equity in the borrowers home as collateral. Taking out a home equity loan therefore means putting the borrowers home at risk. If the borrower fails to pay back the loan, the lender can foreclose and sell the home to pay off the debt.
Home equity loans generally carry lower interest rates than other loans, such as unsecured personal loans, but may involve higher fees and other costs. And they are only available to homeowners who have enough equity in their homes to meet lenders loan-to-value requirements. LTV benchmarks typically limit loans to 80%A fin of the homes appraised value.
Regular home equity loans advance the borrower a single lump sum of cash. Home equity lines of credit let borrowers take cash whenever they want to up to the amount of the loan. HELOC borrowers only pay interest on funds actually advanced.
For Some Interest Is Still Deductible Despite The Tax Cuts And Jobs Act
The Tax Cuts and Jobs Act of 2017 introduced a slew of new tax breaks while doing away with several others. Some of the tax changes directly affected taxpayers who own a home or plan to purchase one.
One of the eliminated measures changed tax benefits for home equity loan interest. Much of that deduction was effectively eliminatedat least through the end of 2025. However, the Internal Revenue Service left a loophole in the current tax law that permits some homeowners to continue benefiting from the home equity loan interest deduction, but only if they meet certain criteria.
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Know Where You Stand With Both Mortgages
The loan you first took out to buy the home is your first mortgage, and the home equity loan is your second mortgage. Both mortgages must fit IRS requirements. Combined, the debt must:
- Not exceed $750,000 or $1 million, depending on when the loans were taken out
- Be secured by a qualified residence, which can be your main home or second home
- Not exceed the value of the residence
- Be used to acquire or substantially improve the residence
You can find the dollar amounts of your mortgage and home equity loan on your most recent billing statements or by calling your loan servicer.
Next, confirm whether the home equity loan was used to buy, build or improve your home. Heres a rule of thumb: A substantial improvement is one that adds value to the home, prolongs its useful life or adapts a home to new use. While the IRS doesnt offer a full catalog of expenses that fit this description, here are a few examples:
- Building an addition to the home
- Installing a new roof
Deducting Interest On Home Renovation Loans
Homeowners who take out home renovation loans also need to be aware of changes. The IRS now stipulates that you can only take the deduction when making substantial renovations.
What this means is that if youre making cosmetic upgrades to your home, you may no longer qualify for the deduction.
Repairs designed to maintain the propertys condition, such as painting the outside of the house, no longer qualify.
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Is Home Equity Interest Still Deductible
This article appeared in the Summer 2018 edition of the Mountain America Credit Union Newsletter
Home equity is the appraised value of a home, minus what the homeowner still owes. This value will determine what kind of home equity loan or home equity line of credit you are able to secure. When tax reforms were passed in 2017, many taxpayers and tax professionals worried that new restrictions would effectively end deductions for and second mortgages. Now, the IRS is saying interest paid on home equity debt may still be tax deductible, at least in some cases.
With all of these changes, you may find yourself pondering a few questionsAre home equity loans tax deductible? Is HELOC interest tax deductible? Is home equity loan interest tax deductible? In the end, it comes down to two points. Lets dive into the details to find a deeper understanding.
How you use the moneyThe first point to consider is how youre planning on using the money. The funds acquired from home equity loans, HELOC tax deductions and second mortgages must be used to purchase, build or substantially improve the primary or secondary home that secures the loan.
In other words, if you pay for things like an addition on your house, a newly updated roof or , you still have the opportunity to deduct the interest. However, if you use the money to consolidate credit card debt or take a vacation, the interest is no longer deductible because it wasn’t used for the house.
What if you dont meet the new requirements?
Selling Your Home Will Be Affected By Updates To Capital Gains Rules
The IRS grants an exclusion on real-estate capital gains up to $500,000 for married couples filing jointly, and $250,000 for singles . However, you must have lived in the home for at least two of the last five years prior to its sale. For example, if you bought a home a few years back for $300,000 and sold it today for $900,000, youd make a $600,000 profit. So if youre married and filing jointly, as little as $100,000 of your gain could be subject to tax.
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Interest On Home Equity Loans Deductible In Some Cases
On February 21, 2018, the IRS issued a special advisory to explain that, in many cases, taxpayers can continue to deduct interest paid on home equity loans. The fact that they even issued this advisory indicates the widespread confusion over the subject. In fact, they mentioned it directly:
Responding to many questions received from taxpayers and tax professionals, the IRS said that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit or second mortgage, regardless of how the loan is labelled.
- Basically, if youre using the money received to build out or improve the property, the interest you pay on the equity loan should be tax-deductible.
- But if youre using the money for other expenses , the tax deduction is no longer allowed.
Deducting Home Equity Loan Interest On Your Taxes
As of 2017, the rules around deducting interest on home equity loans have changed and may change again in 2026. You may only deduct interest on $750,000 of qualified residence loans, or the limit is $375,000 for a married taxpayer filing a separate return, according to the IRS.
This means that your total mortgage debt cant exceed $750,000 to deduct the interest.
For home equity loan interest to be deductible, you must use the money to buy, build or substantially improve home that secures the loan, according to the IRS. Improvements that improve your home are called capital improvements, such as installing a new roof or adding a home office.
If you use the home equity loan to pay for personal expenses such as student loans, credit card debt, or buying another home the interest isnt deductible.
Home improvements that are tax deductible
Generally, a home equity loan used for captial improvements on your home is tax deductible. A capital improvement is an improvement that increases your homes value.
Here are some capital improvements that can be tax deductible and some improvements that wont qualify:
As a general rule of thumb, capital improvements add significant value to your home, and regular repairs on existing structures arent eligible for tax deductions.
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What Youll Need To Claim The Home Equity Loan Interest Deduction
- Copy of the 1098 form. You should receive a form 1098 from your current loan servicer at the end of the year. The amount listed in Box 1 shows the amount of interest you paid.
- Copy of your closing disclosure. Youll receive a closing disclosure three business days prior to closing, which provides a breakdown of all the costs paid when your home was purchased.
- Copy of your loan application. Also called a uniform residential loan application, have a copy handy as added proof that the home you purchased was a primary residence or second home.
- Copies of home improvement expenses. Keep your invoice, receipts and work orders to prove you used your home equity loan funds for home improvements.
Is Interest On A Home Equity Line Of Credit Tax Deductible
If you need cash and have equity in your home, a home equity loan or a home equity line of credit can be an excellent solution. But the tax aspects of either option are more complicated than they used to be. Interest on a HELOC may be tax deductiblebut there are conditions.
There are two types of home equity lending: a fixed-rate loan for a specified amount of money, or a variable-rate line of credit . Depending on your need for the funds and how you plan to use them, one option may work better than the other. Interest paid on either loan, like the interest on your first mortgage, is sometimes tax deductible.
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Is It The Right Move To Deduct Interest On A Home Equity Loan
It depends on your personal circumstances.
The standard deduction has changed to $12,000 for single filers, $24,000 for married couples filing jointly, and $18,000 for heads of household. In addition, senior citizens and the blind can take additional standard deductions, depending on their current marital status.
In many cases, the standard deduction will provide a larger tax deduction than itemizing things like home equity loan interest.
Another influencing factor could be the exemptions set out for the AMT, otherwise known as the Alternative Minimum Tax. This applies mainly to high-income taxpayers so that theyre not using various tax credits to avoid paying their fair share of tax.
If you qualify, you must file a regular return and a special AMT return. Whatever amount is higher is the amount paid.
The TCJA ensured that fewer people would pay the AMT. The new exemptions are as follows:
- $109,400 for married couples filing jointly.
- $54,700 for married couples filing separately.
- $70,300 for other tax filing statuses.
These are significant increases on what the limits were before.
If you dont have to pay the AMT, you can still deduct mortgage interest. But you cant deduct home equity interest. So high-income taxpayers will find less benefit in opting to itemize their interest payments on home equity loans.
What To Expect For The 2020 Tax Year
This is the last year youll be able to take the residential energy credit. You may be able to get a tax credit equal to 22% to 30% of the improvement costs toward eco-friendly improvements like installing solar panels or energy-efficient appliances. The incentive expires on Dec. 31, 2021.
Also, remember that you cant deduct your home equity loan interest if you take the standard deductions, which are slightly higher in 2021 versus 2020. If you arent sure whether to itemize or take the standard deduction, contact a tax professional for guidance.
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What Youll Need To Claim The Home Loan Interest Tax Deduction
To claim a home equity loan interest deduction, youll need to itemize your deductions on Schedule A .
Youll also need to save documents that substantiate your claim. You wont submit them with your tax return, but you should keep them on file as proof of how much interest you paid and how you used the loan proceeds in case youre ever audited. Heres what to keep:
- 1098 forms from your home lenders
- Bank statements showing mortgage payments
- Your loans Closing Disclosure
- Receipts, invoices, and contracts for home renovations or construction expenses
While Credible doesnt offer home equity loans, we can help you find a great rate on a cash-out refinance. In just a few minutes, you can see personalized, prequalified refinance rates from all of our partner lenders.
Basics Of The Mortgage Interest Deduction
Home equity loan interest tax deductions are one of the multiple mortgage-related interest tax deductions that you may be able to claim. A mortgage can help you buy a home or borrow against a property you already own in the case of a home equity loan. It might even provide some tax benefits since the interest you pay is sometimes deductible.
Under the home mortgage interest deduction, the IRS allows you to deduct the interest you pay on any loan secured by your main home or a second home, including:
- Home equity loans , which provide a lump sum of cash up front
- Home equity lines of credit, which allow you to spend from a credit line
As of tax year 2021, you can only deduct interest on a home equity loans or home equity lines of credit if the loan amount is used to buy, build, or substantially improve the home against which the money was borrowed.
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Why Does The Govt Offer Tax Benefit On Home Loan
Along with property ownership comes the responsibility to pay taxes. This is why an individuals income from house property is taxed, based on its potential to earn a particular amount as rent, even if the unit is lying vacant. However, to make property purchases more lucrative, the government offers various tax benefits, especially if the property has been purchased using a home loan. Buying a property using housing finance also offers additional benefits you can be a home owner much earlier than you would be, in case you have to rely solely on your savings. Buying a property with home loans has become even more lucrative now, since home loans are currently available at interest rates as low as 6.65% per annum.
Terms And Conditions For Home Buyers To Avail Of Benefits Under Section 24
1. If you have taken a loan to build a home, the construction work should be completed within 5 years of taking the home loan. 2. The deduction is capped at Rs 30,000, if the house is not constructed within 5 years of taking the loan. This period starts from the end of the financial year in which the loan is borrowed. 3. The deduction can be claimed from the year in which the construction is completed. 4. The loan should have been taken after April 1, 1999. 5. A certificate from the bank about the interest calculation is required, to claim the benefit. 6. Deductions under Section 24 are offered on accrual basis interest is calculated for each year separately and the rebate can be claimed even if no actual payment is made.
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Can I Claim Home Loan Tax Benefit Along With Hra
A tax payer can claim home loan tax benefits along with house rent allowance in two scenarios. A: he is paying EMI for an under-construction project. B: he is living in a rented accommodation while his own property is also let out. In the latter scenario, his income from house property would be taxable.
Terms And Conditions For Home Buyers To Avail Of Benefits Under Section 80ee
1. The purchaser must be a first-time home buyer. 2. The property value must not exceed Rs 50 lakhs and the loan value should be up to Rs 35 lakhs. 3. Deductions can only be claimed if the loan is borrowed from a financial institution. Rebate is not applicable if the loan is borrowed from family members or friends. 4. Tax payer can claim the rebate under Section 80EE only after exhausting the waiver provided under Section 24.
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The Tax Advantages Of Home Equity
The rent-vs.-buy debate has been a long-running one. However, there is one advantage to owning a home that renters will never enjoy: the tax breaks that come with paying off a mortgage loan.
You might have heard of the mortgage interest deduction even if you have not yet purchased a home. The deduction, a valuable one for homeowners, has been in the news lately as some economists call for its elimination or scaling back as a way to help chip away at the deficit.
The mortgage interest deduction, though, remains, and it is still a valuable financial perk for homeowners.
The mortgage interest deduction
This tax break allows homeowners to deduct the mortgage interest that they pay each year on their home. The best news? This tax deduction does not just come on your home’s first mortgage loan. If you’ve taken out a home equity loan or a home equity line of credit, you might be able to deduct all or part of the interest you pay on these loans, too.
However, before you claim your deductions, it is important to know the limits that come with them.
In general, individual homeowners and those married who are filing their taxes jointly can deduct the interest they pay each year on up to $1 million in combined home loans. Homeowners who are married but filing their income taxes separately can deduct the interest they pay each year on up to $500,000 in combined home loans.
Home equity loans and lines of credit