The 2018 Tax Cuts and Jobs Act (“TCJA”) altered the rules surrounding tax deductions on home equity lines of credit (“HELOC”); many people leverage their home equity to liquidate assets, using their property as collateral. This article will briefly discuss the rules surrounding tax deductions and HELOCs.
As an initial matter, it is important to understand the distinction between “acquisition debt” and “home equity debt.” The first consists of loans for the purpose of buying, building, or improving” a “primary or secondary home.” While everyone immediately understands that their first mortgage is necessarily an “acquisition debt,” since it is being used to purchase a primary home, many fail to realize that a HELOC, for the purpose of improving your home also constitutes an “acquisition debt.” “home equity debt” encompassed HELOCs that are used for something other than “buying, building, or improving a primary or secondary home” (e.g., buying a third home, paying for a wedding, paying for college, etc.,). The IRS treats “acquisition debt” far kindlier than “home equity debt.”
Prior to the TCJA, people were able to deduct up to $100,000 of interest on “home equity debt,” provided your total mortgage debt fell under $1 Million. After TCJA, the interest on “home equity debt” was removed. In contrast, “acquisition debt” remains deductible, but only to a certain limit. Any loan after December 15, 2017 is subject to a $750,000 cap; that means you can only deduct interest on a loan up to that limit. By way of example, Homebuyer takes out a $1.5M loan for their first home at 3% APR (to keep it super simple). At the end of the first year, Homebuyer will have paid approximately $60,000 in interest (this doesn’t account for how much they paid down the principal on their mortgage, but this isn’t a math test). Unfortunately, Homebuyer will only be able to deduct $30,000 of interest for the year. The takeaway here is that your best HELOC option, for tax purposes, is to only leverage your home when it will be categorized as an “acquisition debt.”
At the Chernov Team we understand that knowledge is power, and knowledge of the tax laws surrounding HELOCs is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.