Home equity loans afford homeowners the opportunity to access extra cash quickly. While using your home as collateral may not seem like a big deal, the rules of such debt have changed dramatically thanks to the Tax Cuts and Jobs Act and you need to know the tax benefits and burdens for 2018 and 2019.
Know the difference between acquisition debt and home equity debt:
Acquisition Debt: a loan designed specifically for those wishing to buy, build, or improve a primary or secondary residence and is secured by the home. Most mortgages are secured by home buyers and considered acquisition debt, however, funds used to build or remodel a home also fall under the category of acquisition debt as such endeavors will likely increase the value of a property.
Home Equity Debt: Proceeds used for purchases other than buying, building, or improving a home. If a homeowner secures a line of home equity credit to be used for a wedding, new business venture, college, etc., such pursuits would constitute home equity debt.
It is important to understand the difference as Uncle Sam will be sure to differentiate when you file your 2018 income taxes. Home equity debt used for non-property-related ventures is not treated as kindly as acquisition debt.
Related: “2018 Introduces Increased Interest Rates”
Home equity debt is NOT tax-deductible:
As of 2018, home equity debt interest is NOT tax-deductible even if you secured the loan prior to the passage of the new tax bill. This is true for ALL home equity debts and cash-out refinancing. On the bright side, acquisition debt (monies used to buy, build, remodel a home) continues to remain tax deductible…up to a certain point. New loans secured on or after December 15 are subject to the new $750,000 limit for a mortgage interest deduction. Understand that the IRS is limited in how generous they choose to be for those wishing to buy, build and/or remodel. If you are doubtful regarding your debt, consult an experienced CPA to help you navigate the new rules.