You may be curious as to whether you are permitted to a valuable tax deduction for the interest you pay on a loan, if you have a home equity line of credit (HELOC). The laws for deducting mortgage interest have changed.
There could be a benefit when you borrow on the equity of your home: the interest you pay per year is tax-deductible up to a government-imposed cap, as long as the money you borrow goes towards improving your home.
Any homeowners who have in the past been able to deduct their mortgages or HELOCs will no longer be able to capitalize on a mortgage interest deduction. Here’s everything you need to know about saving tax via HELOC.
In the past, the problem of whether or not your home equity line of credit was tax-deductible was complicated enough. Still, the Trump Tax Reform adds further confusion to this standard method of accessing your home equity.
Your HELOC will provide some tax benefits for many of you reading this; for others, the interest in your HELOC would not be deductible. Some homeowners can notice that only a particular portion of their HELOC or second mortgage is tax-deductible, to make this dividing line even less noticeable.
Ultimately, your personal mortgage and how you file your taxes will depend on it.
What Things Are Affected
One primary question homeowners are raising this year is if the interest on a home equity loan under the new tax law is tax-deductible. The answer is yes, but more constraints exist than in previous years.
The Tax Cut and Jobs Act were passed in 2017, but this is the first year that homeowners have to apply the new laws to pay their taxes. Under the new legislation, on any home purchased after Dec. 15, 2017, you can subtract mortgage-related interest on up to $750,000 worth of eligible loans on married couples filing jointly and $375,000 for separate filers.
For all tax years between 2018 and 2025, the amendments under the new law apply. The deduction number covers the interest you pay on your mortgage, home equity loan, credit line of home equity (HELOC), or your mortgage refinancing.
You will subtract interest on $1 million worth of eligible loans for married couples and $500,000 for those filing separately for the 2018 tax year if you have taken on the debt before Dec. 15, 2017.
Apply for a Deduction: How?
Depending on when the loan began and whether you are filing with or separately from your partner, the IRS permits interest deductions on up to $750,000 or $1 million in mortgage borrowing. For the 2018 tax year, the provision came into effect and was a massive improvement from previous years, where you could subtract interest regardless of what you used the money for.
If they are first (your primary mortgage) or second (home equity) mortgages, the limit applies to the combined amount of all loans. For 2019, the interest earned on home equity proceeds used only to “buy, build or significantly develop the home of a taxpayer who secures the loan,” says the IRS, will be deducted.
Home equity loans and credit lines are different items, but the rules for deducting interest are the same. For a home equity loan, you borrow a lump sum at a fixed interest rate for a specified period of time. By contrast, HELOCs are more versatile.
You may pull out those funds at any point during the drawing period, which typically lasts for 10 years, after qualifying to borrow a certain amount. The interest rate is adjustable or variable on a HELOC and meets market rates.
What You Need to Do
You can obtain an IRS Form 1098, or Mortgage Interest Statement, from your lender or lenders prior to tax time. It illustrates the interest you paid in the previous year on your primary mortgage, home equity loan, or HELOC.
When you want to subtract the interest on your home equity loan or line of credit, you will need this form. If you don’t get a 1098 or if you want assistance with interpreting it, contact your lender.
You can hire a professional if you normally prepare your taxes yourself, particularly if you’re not sure about deduction eligibility or whether you should itemize or just take the standard deduction.