The Tax Cuts and Jobs Act changed the standard deduction for taxpayers. It increased the deduction enough that many people take the standard deduction. If you don’t itemize your deductions, you can’t write off interest on any loan, let alone your HELOC.
Assuming your deductions exceed the standard deduction limit, can you deduct the interest payments on your taxes any longer?
The Previous Ruling
Prior to the Tax Cuts and Jobs Act, you could deduct interest on up to $100,000 from a HELOC. It didn’t matter what you did with the money, you could deduct the interest. If you borrowed more than $100,000 in a home equity line of credit, though, you couldn’t deduct that amount.
The New Ruling
Today, you can only deduct the interest on your HELOC that you used for home improvements. In addition, the amount you deduct must fall under today’s limits. Any loans taken out after December 15, 2017 can write off interest on loans up to $750,000. This takes into consideration both your first and second mortgage.
For example, if you have a first mortgage of $750,000, you would not be able to write off any interest on a HELOC, if you had one. If, however, you had a first mortgage of $500,000, you could write off HELOC interest up to $250,000, assuming you used the funds for home improvements.
If you took out your mortgages prior to December 15, 2017, you get the grandfathered limit of $1 million. In other words, you could write off interest on a combination of home loans up to $1 million. The only exception to the rule is if you spent the fund from the HELOC after December 15, 2017. If you did, then you are back at the $750,000 limit.
Second Homes Count Too
One thing that didn’t change with the Tax Cuts and Jobs Act is the ability to include interest paid on a second home. If you have two homes – you can write off the interest on all mortgages. However, the $750,000 limit is in place and takes into account all homes that you own. The $750,000 limit is per person, not per home.
Proving How you Spent the Funds
As you probably guessed, you have to carefully track how you spend your funds if you want to write off the HELOC interest. If you make changes to your home with the funds, keep careful receipts. If you have contractors do the work, keep the contract and any paid receipts.
If you are unsure what the IRS will need, talk with your tax advisor before you do the work. You don’t want to find out after the fact that you can’t deduct the interest you paid on a second loan because of a paperwork issue.
Using a HELOC to Pay off Debt
If you happen to use your HELOC to pay off debt rather than fix up your home, it can still be a good idea. No, you can’t write off the interest, but that’s not the issue here. If you are so far into debt that you can’t keep up with the payments or you feel like you’re getting nowhere because of the hefty interest rates, a HELOC can help. Because the standard deduction limits increased, many taxpayers don’t even itemize their deductions any longer, but they still get a decent deduction ($12,200 for single filers and $24,400 for married filing joint filers).
Talk with your tax advisor before assuming you can write off your HELOC interest. In most cases, you won’t be able to, but find out what pertains to your case for sure. This way you’ll be able to make an informed decision before tapping into your home’s equity.