If loan proceeds were used to ACQUIRE, BUILD or make significant improvements….
In the rush to get news on the recently passed Tax Cut and Jobs Act out into the public domain, a good number of articles were short on detail or misleading. Most sources reported that Home Equity Line of Credit or Home Equity Loan (“HELOC” or “HELOAN”) interest is not deductible, end of story.
Old rules
Previously, a homeowner could take a tax deduction for interest on the first $100,000 of home equity loan proceeds, up to the fair market value of the home (this limitation is rarely in-play, given that most lenders will not loan more than the homes fair market value). What the HELOC proceeds were used for was irrelevant. So, using a home equity loan to buy a car or pay for college might have been the best choice.
New Rules
The new tax law disallows a deduction for “home equity indebtedness”. However, it allows a deduction for “acquisition indebtedness” up to $750,000 for a property acquired after December 15th, 2017, and up to $1,000,000 on loans on property acquired before that date (these limits are for married taxpayers filing jointly; for single taxpayers the amounts are half).
This means that if you used a HELOC to “piggyback” on your first mortgage to stay under the “JUMBO” limits, interest is deductible on the first $100,000 of HELOC or HELOAN principle. It also means that if you used the loan to add on to your home or significantly improve it, you may also take a deduction.
Now, in practice, when you file your return, you will use the 1099 from your primary mortgage lender (1st mortgage), as well as the 1099 from the lender of your HELOC (2nd mortgage). Deducting interest from two 1099’s may raise a flag. It remains to be seen if and how the IRS will evaluate this. In the case of folks that used a 1st and a 2nd to purchase a home to stay under the jumbo limits it is pretty clear that the HELOC was actually an acquisition loan, and the transaction to purchase was simply financed using two loans instead of one.