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Can I Deduct Interest on a Home Equity Line of Credit in 2018? by Joanie B. Stein, CPA

Posted on October 09, 2018 by Joanie Stein

With real estate values appreciating and interest rates still relatively low, an increasing number of consumers have been using the equity in their homes as collateral against lines of credit that they can use to immediately pay for large expenses, including home upgrades, medical bills, college tuition, and even lavish vacations. However, the new tax laws limit homeowners’ ability to deduct interest on home equity lines of credit (HELOC) for eight tax years beginning in 2018.

Under the Tax Cuts and Jobs Act, interest deductions are available only on a combined total of new mortgage loans and HELOCS originating in 2018 through 2025 that are $750,000 or less. In addition, the law allows taxpayers to deduct the interest on HELOCs only when they use the loan proceeds to buy, build or substantially improve a primary home or a second qualifying residence. Interest is not deductible when taxpayers use a HELOC for any other purposes.

Therefore, a taxpayer can deduct interest on a HELOC they enter into in 2018 to replace a home’s roof, build an addition or renovate a kitchen or bath, as long as the total loan amount is below the limit. Loan interest is neither deductible when the combined total of loans used to buy, build or improve the taxpayer’s main home and second home exceeds the $750,000 threshold nor when taxpayers use the proceeds to pay off credit card debt, pay down student loans or help them afford a new car. This does not mean that taxpayers cannot borrow against the equity in their home to access cash. Rather, they just cannot deduct the loan interest they pay annually.

In light of these new limitations, homeowners with liquidity needs should meet with their tax accountants and financial advisors to identify other tax-efficient strategies for paying needed expenses without exposing themselves to any additional risks.

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

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