The recently passed tax bill suspends the itemized deduction for interest on home equity indebtedness, beginning with tax years after December 31, 2017. A taxpayer, however, may still be able to claim a deduction for some or all of the interest on a home equity line of credit (HELOC). The type of loan (e.g. traditional mortgage, home equity line, home equity line of credit) will not be a deciding factor in deductibility. Going forward, the determining factor for deductibility will be the use of the funds that were borrowed.
Personal Use Indebtedness
Existing law through the end of 2017 permitted deductible interest on home equity up to $100,000 loan proceeds. The interest on $100,000 could be deductible, regardless of how the proceeds were used. For example, one could use home equity borrowing to pay off high interest credit cards, student loans or personal expenses such as a car. The new law has modified the deductibility rules such that interest for these types of personal expenses is no longer deductible.
Notably, if one has a home equity line of credit, and the proceeds were for acquisition indebtedness, rather than personal use, the interest may still be deductible. Acquisition indebtedness is that incurred in purchasing, constructing or substantially improving the primary residence of the taxpayer. If your existing HELOC was used for both acquisition and personal expense indebtedness, then you will need to determine the pro-rata portion of deductible interest for the acquisition purposes.
A complexity of the law is the potential temporary nature of this revision. Under the new law, the restriction on deductibility ends after December 31, 2025. But for now, HELOC deductibility depends on whether it was personal use home equity indebtedness (not deductible), or acquisition indebtedness (deductible). Additionally, there is no grandfathering provision. The new rules apply to existing debt before December 31, 2017 and newly acquired debt up to December 31, 2025.
Home equity borrowing for personal uses should still be attractive in many cases despite the loss of the tax deduction. HELOCs can offer flexible repayment plans, standby use for emergencies and competitive rates compared with other options such as credit cards or unsecured personal loans. We summarized comments and examples of using a HELOC to your advantage in this previous post “Why We Often Recommend Our Clients Have a HELOC.”