Tax loophole discovered for interest on home equity loans


The Tax Cuts and Jobs Act of 2017 introduced a slew of new tax breaks while removing several others. Some of the tax changes have directly affected taxpayers who own a home or plan to buy one.Inasmuch asInasmuch as

The changes include a reduction in the mortgage interest deduction limit. The deduction can only be claimed for interest paid on mortgage debt up to $750,000 if the loan was taken out after December 15, 2017. The previous limit was $1 million. For example, if you have an $800,000 mortgage, you cannot deduct the interest paid on $50,000 of that loan.Inasmuch asInasmuch as

In addition, going forward, there is a $10,000 cap on itemized deductions for state and local taxes (SALT), including property taxes.Inasmuch asOne of the removed measures concerns tax benefits for interest on home equity loans. Much of this deduction has effectively been eliminated, at least until the end of 2025.Inasmuch asInasmuch as

The Internal Revenue Service (IRS), however, has left a loophole in current tax law that would allow some homeowners to continue to benefit from the home equity loan interest deduction.Inasmuch asInasmuch as

Key points to remember

  • Despite the new provisions of the Tax Cut and Jobs Act, the IRS, in a 2018 briefing note, said interest on home equity loans may still be deductible, along with interest on HELOCs and second mortgages.
  • To qualify for this deduction, the loan money must be for an IRS-approved use: namely, “to buy, build, or substantially improve the taxpayer’s home.”
  • Loan proceeds, however, cannot be used to pay off personal debts or other ineligible expenses.
  • The deduction is not unlimited. Only interest on mortgage debt up to $750,000 is deductible if the mortgage was granted after December 15, 2017.Inasmuch asInasmuch as

New home equity loan interest deduction rules

In February 2018, the IRS issued an information notice to taxpayers regarding the status of the home equity loan interest deduction under the new set of tax laws. The memo clarified that interest on home equity loans, home equity lines of credit (HELOCs), and second mortgages could still be deductible, as long as the loan was for an IRS-approved use.Inasmuch asInasmuch as

Specifically, second mortgages must be used to “purchase, build or substantially improve the home of the taxpayer securing the loan” for the interest to be deductible.Inasmuch asInasmuch as

Although the IRS did not include a list of expenses that would be covered by the provisions of the law, its advice did include some examples of allowable home improvement expenses, such as building an addition to your House. Other purposes that qualify for the deduction if you use a home equity loan or HELOC include:

  • Installation of a new roof on the property
  • Replacing your HVAC system
  • Carry out a large kitchen or bathroom renovation project
  • Resurfacing your drivewayInasmuch asInasmuch as

Impact of new rules on home equity loans

Maintaining this deduction for eligible taxpayers is good news for homeowners. An October 2017 TransUnion report estimated that more than two-thirds of homeowners could qualify for a HELOC, and HELOC creations are expected to reach up to 11 million by 2022.Inasmuch asInasmuch as

The report also estimates that there will be more than double the number of consumers opening a HELOC by 2022 compared to 2016.Inasmuch asMaintaining the home equity loan deduction, even in a limited form, can also have positive implications for encouraging home ownership.

Other provisions of the bill, however, could have the opposite effect. In addition to steep reductions in state and local tax deductions, the standard deduction nearly doubled to $12,000 for single filers and $24,000 for married couples filing jointly.Inasmuch asInasmuch as

According to a 2017 report by the National Association of Realtors, the higher standard deduction should reduce the number of taxpayers who would find it beneficial to claim mortgage interest and property tax deductions while retailing.Inasmuch asAnd, indeed, according to a report by the New York Times based on IRS statistics, 20% of taxpayers claimed the mortgage interest deduction for the 2017 tax year, but only 8% did so for the 2018 tax year.Inasmuch asInasmuch as

This implies that there was little tax gap between renting and owning for over 90% of taxpayers that year.

Nonetheless, maintaining the home equity loan deduction can be seen as an added incentive to buy instead of rent.


The number of taxpayers who took advantage of the mortgage interest deduction in the 2018 tax year. This is down from 20% the previous year.

Best Practices for Claiming the Home Equity Interest Deduction

If you are a homeowner and are considering claiming the interest deduction on home equity loans, there are a few things to remember.

First, the money must be used for home improvements or renovations. You may not qualify for the deduction if you use the proceeds from your home equity to pay for personal expenses or to consolidate credit card debt, for example. The same is true if you take out a loan and leave the money in the bank as a case fund for emergencies.Inasmuch asInasmuch as

Also, the renovations must be done on the property you are taking the home equity loan on. You cannot, for example, take out a loan on your primary residence and use the money to renovate your lakeside cottage.Inasmuch asInasmuch as

Expense records and deduction limits

Next, keep proper records of your expenses. The chances of being audited by the IRS are generally low, but you don’t want to take any chances. If you plan to use a home equity loan or HELOC to pay for home repairs or improvements, be sure to keep receipts for all your expenses and bank statements showing where the money went.

Finally, remember that this deduction is not unlimited. You can deduct interest on up to $750,000 of home loan debt, if the loans were made after December 15, 2017. If your total mortgage debt is more than that, you won’t be able to deduct all of the combined interest paid. . . The $1 million limit applies to mortgages obtained before that date.

Since interest on older mortgages retains a $1 million loan legacy, check with your accountant carefully what you can deduct if you have both an older mortgage and a home equity loan that gives right to deductions.

The essential

A home equity loan or HELOC can be a handy source of financing when you want to spruce up your home. Hooking up a tax deduction for the interest you pay is an added benefit. However, as with any other loan, take the time to compare interest rates and loan terms from different lenders to find the best possible deal.


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