The Act on tax cuts and employment in 2017 introduced a number of new tax breaks, while eliminating others, one of which was to affect the interest rate on housing loans. Can you deduct home equity loan interest?
New rules for deducting interest on a home loan
In February 2018, the IRS issued advice to taxpayers regarding the status of deducting interest on a housing loan. The guide specifies that interest on home loans, home loans (HELOC) and a second mortgage can still be deducted, regardless of how the loan is marked, provided the loan is for IRS approved use.
In particular, home equity loans, HELOC or a second mortgage must be used to “purchase, build or significantly improve the home of the taxpayer securing the loan” so that interest can be deducted.
Although the IRS did not include a list of expenses that would be subject to legal regulations, the guidebook provides examples of eligible expenses for home renovation. For example, you may still be eligible for a deduction if you are using a home loan or HELOC to do the following:
- Build an add-on to enlarge your home
- Put a new roof on the property
- Replace your HVAC system
- Complete a comprehensive kitchen or bathroom remodeling project
- Discover the surface of your driveway
When can you deduct interest on a loan secured by equity
If you are improving your property, chances are your interest will be tax deductible, but make sure you’re an accountant. You should improve the property for which you take out a loan against your home. In other words, you can’t take out a house loan in the main residence to remodel the beach house. Actually you can. You just can’t deduct interest. Here are some examples of renovation projects that would qualify for interest tax deduction:
- Installing a new roof at home
- Construction of a new porch, terrace or patio
- Installing the pool in the ground
- Replacing the Windows system
- Kitchen or bathroom renovation
- Building an extension to house expansion
- Replacement of the HVAC system
- Paving the driveway
- Rebuild the house completely
- Addition of a new siding
This gives you a general idea of all renovation projects that are still tax deductible. So what kind of expenses can not be tax deductible. Personal expenses, paying off credit card bills and other debts, educational expenses, vacation, buying a car or home furnishings are examples of expenses that cannot be tax deductible. Everything to keep in mind when deciding on the best type of loan when borrowing .
If you want to deduct HELOC interest on your taxes, you must be aware of tax changes. Your loan is only tax deductible if it has been used for a home. If you used a loan to buy a second home or refurbish your home and you qualify for a tax deduction, find out if the specific deductions will be higher than the standard deduction.