Home Equity Interest May Not Be Deductible

Many homeowners have taken out a home equity line note and in the past have been able to deduct the interest from the note (upto $100,000) regardless of what the money was spent on, but NO MORE!  The new tax law that went into effect in 2018 does not allow this deduction.

But wait, there may be some help for some people.  Everything I am about to write is based upon my research and that of other reliable professional services, however, there is much that the IRS still needs to do to inform us how the new law will actually work in the real world.

Two Types of Resdence Interest

The new law breaks “qualified residence interest” into two categories: 1) Acquistion indebtedness and 2) Home equity indebtedness.  So, if your home equity note or line of credit (HELOC) is deductible or not will be determined by wether it is considered Acquistion or Home equity indebtedness.  At this point, since the IRS has issued no guidance or definitions, it is difficult to say for sure exactly what consistutes “Acquistion indebtedness.”  Since the IRS has not issued guidance, there are some that are taking the stance that all home equity interest is nondeductible and others that beleive that if the home equity note is used for making improvements to the existing house, the interest would still be deductible.  Part of the reason for the confusion is that generally Acquistion indebtness has been defined as “indebtedness that is secured byt the residence and that is incurred in acquiring, construction, or substantially improving any qualifed residence of the taxpayer.”  If that continues to be the definition then I believe home equity interest would be deductible to the extent the loan was used to make substantial improvements to the residence.

No Grandfathering of Existing Equity Notes

To add to the complexity of 2018 and forward, there is no grandfathering of existing loans.  So for instance if you already have a home equity loan and have in the past been deducting the interest, now we will need to trace where the loan proceeds went (what they were used for) and make a determination for 2018 if any  of it is deductible.  (Hopefully, you have kept great records of what the money was used for!)

Bottom Line

At least the new law appears very clear that if you have or obtain a Home Equity Note and use it for anything other than making substantial imrovements to your primary residence, the interest is not deductible – even if you took out the loan prior to the new law going into effect.

Like so much of the new law, we are waiting on the IRS to issue guidance as to how it will work in the real world and home equity loans are one area we are still waiting.

Check back with us often for new information or better yet subscribe to our email service that provides you upto date information on tax and financial matters that you can use right now to benefit you!