Dec. 22, 2018
Home equity loans have always been a popular way to pay for home improvements and other expenses, thanks in part to their tax advantages. But the rules have changed. Click through for the latest on home equity loans.
Because of recent changes, equity loan proceeds are deductible only under specific conditions. When the proceeds from home equity loans (including second mortgages, equity credit lines or some refinancings) are used to buy, build or substantially improve the taxpayer’s primary home that secures the loan, the interest on these loans is fully deductible in many cases. All mortgages and equity loans (that meet the above criteria) up to a combined total of $750,000 are deductible. Note that some state laws restrict home equity loans.
For example: In January 2018, you took out a $400,000 mortgage on your primary home that has a fair market value of $800,000. In February 2018, you took out a $250,000 home equity loan to put an addition on your primary home and make other improvements to the home. Because both loans are secured by the primary home and the grand total of the loans ($400,000 + $250,000 = $650,000) does not exceed the value of the home ($800,000) and the total of all loans does not exceed $750,000, all of the interest paid on both loans is deductible.
However, if any of the proceeds from home equity loans are used for reasons other than to buy, build or substantially improve the taxpayer’s primary home, the interest is not deductible. In another example, if you use home equity proceeds to pay for a child’s college tuition, a new car, medical bills, other debt, you cannot deduct the interest.
This is just an introduction to a complex financial topic. For more details on what you cannot deduct, consult a qualified financial professional.