- October 26, 2022
- Posted by: Gunveen Bachher
- Category: U.S Taxes and Businesses
Preview: Increase Cash Flows With A HELOC And Do Not Forget To Take The Interest Deduction On It!
With a HELOC or also known as a home equity loan, you can get a new home or pay off student debt.
And the best part, you can deduct the interest you paid on those loans on your tax return.
Under the Tax Cuts and Jobs Act of 2018, with 14.5 million HELOCs borrowing over $600 billion, the new code has affected many Americans ever since.
The new law still allows you to avail of the home equity benefit but has changed rules on how to take the interest deduction though.
The new rules go as follows:
- Borrowings can be used to buy, build, or make substantial improvements to your home. (If you are thinking of going on a cruise with that money, you can still do it, but you just can’t take a deduction on the interest).
- The loan must be used to improve the house securing the loan. Example, you cannot use a HELOC on your primary residence to improve a vacation home.
- Interest can only be deducted on the total debt of up to $750,000 for up to two homes. (Refer to example 1 below)
- You can only deduct interest on a HELOC of up to $100,000.
- HELOC deductions are limited to the price you paid for the property (see example 2).
Example 1: Tom has a primary residence and a vacation home. Following are his mortgages for the two homes:
Total borrowings are: $500,000
He borrows $100,000 against each of his property to make improvements.
His total borrowings are now $700,000.
Since he used the money the right way for each of his properties and he is still under the $750k limit, he gets to deduct all the interest on his loans both mortgages+ HELOCs.
Example 2: A Dallas fixer upper costed you $60,000. And you managed to get a HELOC for $80,000 on it for remodeling, which is great. But you can only take an interest deduction on the first $60k of that loan because that is what you paid for the place.
The tax code once again favors the single status over the Married Filing Jointly status. Two singles can take an interest deduction on a combined $1.5m mortgage debt ($750k each). Married couples are limited to the $750,000 combined limit though. 🙁
Bottom line: Good record keeping will take you a long way and keep you audit safe.
We specialize in Tax Planning for Real Estate Entrepreneurs and all Small Businesses.