Home equity loans provide homeowners with an opportunity to borrow money against their home’s equity for various purposes such as home improvements, consolidating debts, medical bills, college fees, etc. These loans use the home as security and let you borrow money in line with the amount of equity.
Families currently possess a large amount of home equity since home values have been increasing in the past few years. This has resulted in increased borrowing of home equity loans and lines of credit. Another question that may come up includes is whether or not home equity interest payments are tax deductible.
The short answer is maybe, since this is quite a vague question Hard work is the key to success The key point is that hard work is an effective strategy. Below are the facts that you should be aware of concerning the tax deductibility of home equity loan interest.
In the United States, the IRS has rules on the tax deductibility of home equity loans
Before the tax reform act of 2018, the interest on the first 100000 dollars of a home equity loan or line of credit was also tax-deductible, just like mortgage interest. This meant that taxpayers could get a tax shield through the home equity loan interest and declare it on their federal income tax returns to lower their total tax expenses.
However, this has changed with the Tax Cuts and Jobs Act of 2017. This tax reform legislation repealed the tax deduction for home equity loan interest payments in 2018 to 2025. However, there are a few of them still remaining.
Here are the current rules regarding the tax deductibility of home equity loan interest:Here are the current rules regarding the tax deductibility of home equity loan interest:
Loans That Were Taken Before 2018 but Was Grandfathered
However, if you have a home equity loan or a home equity line of credit that you took before the year 2018, the interest that you’re going to pay may still be deducted from your taxes regardless of the purpose of the loan. This applies as long as the amount of your grandfathered home equity debt plus your mortgage does not go beyond the fair market value of your home.
If for instance you took out a home equity loan or line of credit before the year 2018 and you’re still servicing it, then the interest payments on it may be tax deductible. Consult with a tax professional to discuss your individual case.
Home loans that were taken to finance the purchase, construction or improvement of the dwelling place.
If you use 100 percent of the home equity loan to purchase, construct or considerably renovate your preeminent residence, the interest on the loan may be tax deductible. The money has to be used for real property expenses like a home addition, remodeling, or construction of your home.
This makes the home equity debt in the same manner as acquisition debt or mortgage debt used to finance the acquisition, construction or improvement of the principal home. This makes the interest payments to be tax-deductible.
Loans Over 100000 Dollars
Another exception pertains to home equity loans exceeding 100000 dollars in value. If your home equity debt, which is grandfathered, combined with the mortgage debt is more than the fair market value of your primary residence, the interest paid on the amount that is over 100000 dollar is allowed under the home mortgage interest deduction.
For example, if your home is worth 500000 dollars and you have a 300000 dollar mortgage plus 150,000 in home equity loans taken out before 2018, 50000 dollars of the home equity loan interest would be tax deductible. Consult a tax preparer to fully grasp these rules.
Can reverse mortgage be deducted on taxes?
Reverse mortgage enables elderly people aged 62 and above to tap into home equity. As with home equity loans, the interest on reverse mortgages is also tax-deductible in specific scenarios.
If the proceeds from the reverse mortgage are used to renovate your principal residence by at least 100%, the interest can be tax-deductible if taken in the first 90 days. If money is used in improvements, repairs or additions to the principal residence, only reverse mortgage interest is allowed.
On the other hand, any amount over 100000 dollars in combined mortgage and reverse mortgage for purposes other than dwelling acquisition can be allowed partial interest deductions. Talk to a competent tax advisor to determine the deductibility of reverse mortgage interest in your particular case.
Filing Taxes – Tax Deductible Home Equity Loan Interest
Even if your home equity loan interest does not meet the above requirements, correctly documenting it is crucial if you want to maximize your deductions. Here are some key points:Here are some key points:
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To report deductible home equity loan interest fill Schedule A, Itemized Deductions to your Form 1040.
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Calculate the deductible amount correctly, in accordance to what the proceeds of the loan were used for.
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Make a note in your records which of the components of your home equity loan interest is tax-deductible.
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Keep copies of other documents that demonstrate how the proceeds of a loan were used in case they are required.
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If proceeds were used for home improvements, retain receipts, contracts with contractors and payment slips.
If you have any questions regarding reporting home equity interest deductions, it is advisable to consult a qualified tax preparer such as a CPA. Accuracy in reporting is crucial to prevent issues or controversies with the IRS in the future.
Can Points and Fees Be Deducted on Home Equity Loans?
Some of the costs involved when taking out a home equity loan include the upfront costs such as the origination fees, processing fees and points. Are such costs a form of capital expense that can be offset with a tax deduction?
Unluckily, most upfront fees and points that are paid when taking out home equity loans are not tax deductible. The only exception is for points paid to acquire a loan that is used to purchase or to rehab the primary residence within 90 days from the date the points were paid.
In that situation, the points can be deducted in the same manner as mortgage points are deducted. Closing costs connected to appraisals, credit checks, surveys, and the like are still not allowable deductions but are still considered closing costs. Speak to a tax expert to know any possible deductions in case your home equity loan is for construction or improvement of your primary dwelling.
Is It Wise to Consider Tax Deductibility while Availing Home Equity Loan?
However, given that the tax deduction is no longer available for most home equity loan borrowing that is not used to purchase, build or substantially reconstruct the home, the benefits are restricted. However, this does not mean that one should not take a home equity loan.
Here are some things to think about:Here are some things to think about:
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Relate interest rates with other types of loans that may be available with higher interest rates. In most cases, home equity rates are very favorable.
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In this case, do not focus only on the possible tax savings in the initial months but on the total monthly payment as well as total amount repaid.
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Consider applying the funds to pay off other debts with a higher interest rate than the loan in question such as credit cards or personal loans. It can reduce interest expenses in the long run.
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Think of other ways that can be useful for a home improvement to be done in order to enhance the lifestyle of your home or the value of your home in the market.
Although the opportunities for tax deductibility are now greatly reduced, home equity loans are still reasonable in many cases. The flexible rates that are favorable to the borrowers and the opportunity to use your home’s equity for massive expenses remain among the benefits of such loans for homeowners.
Conclusions About Home Equity Loan Tax Deductibility
The Tax Cuts and Jobs Act introduced significant changes in the regulation of home equity debt interest deductions for federal income tax returns. This, with regard to this deduction, was more available in the past however, stricter conditions apply here.
Typically, interest on home equity loan will not be tax deductible after this period of time, if not used to buy, build or markedly renovate the user’s main home. However, there is one more stipulation to the rules of deductible interest that existed before the Tax Cuts and Jobs Act of 2018, loans that were taken before then may still be deductible in some cases.
Consult with a tax professional and a lender to determine their IRS rules concerning home equity loans. It is important to properly document and report deductible interest on the company’s tax returns in order to achieve the maximum tax benefit and to minimize any difficulties.
Though tax deductions for them might be limited, it still remains as one of the cheapest means through which a homeowner can borrow money when the need arises by using their home’s equity. When considering taking out one of these loans, just grasp how the utilization of the funds and the IRS rules on capital versus personal expenses affects any possible tax advantages.
