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VF1
Level 1

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

On the IRS website https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law it says "The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan"...... It doesn't say if it's used to pay off mortgage, will it still be deductible.

I called the IRS and I've been told that they are not ready yet to give out information about the new tax reform and I should check back in couple of months or maybe closer to the end of 2018!

I wanted to get the HEL loan now as I found a good rate which will be much better than refinancing option for me but now it's not clear to me if it will be in my benefit or not.

Please advice.
Thanks.
1 Best answer

Accepted Solutions
Level 20

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

You can deduct interest on your acquisition debt only.

Acquisition debt is debt used to buy, build, or substantially remodel the home.

Let's suppose you bought the home for $150,000, with 10% down and a $135,000 conventional mortgage.  You have paid off $10,000 and the current remaining balance is $125,000.  You are not doing any remodeling.  In that case, your current acquisition debt is $125,000, so that is the amount of HELOC balance that has tax deductible interest, no matter what amount you borrow.  If you borrowed $150,000, then 83% of your interest would be tax deductible (125000/150000=0.833).  Even though the original purchase price was $150,000, and the current value might be $180,000, your acquisition debt is limited to the amount of the remaining balance of the purchase mortgage that you plan to refinance.

Or, same set of facts, but you borrow $150,000 and use the other $25,000 to remodel the kitchen.  In that case, you have $150,000 of acquisition debt, so all the interest is deductible.  

Also, for loans made in 2018, there is a maximum deductibility of $750,000 of mortgage or HELOC debt.  

11 Replies
Level 17

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

why would you take a HEL to pay off the other mortgage?
VF1
Level 1

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

To lower my interest rate paid on mortgage
Level 16

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

Refinance the original loan instead.
VF1
Level 1

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

To refinance I'll have to pay closing fee (4 to 5K) VS there is almost no fee or a small fee to get a HEL
Level 17

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

as of right now, unless you use that HEL to buy, build or substantially improve the taxpayer’s home that secures the loan, it will not be deductible.....that being said, the standard deduction was raised substantially, many people that benefited from mortgage interest may not see that benefit any longer....as the standard deduction may end up being higher than many people's itemized deductions.
Level 12

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

My opinion is that the 'tracing rules' would view it as a Refinance, and that it would still be deductible Mortgage Interest.
Level 20

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

...but only up to the amount of "acquisition debt."
Level 4

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

[SPAM removed]
Level 20

If I pay off my mortgage loan using a home equity loan in 2018, will the interest on the home equity loan be tax deductible? Thanks

You can deduct interest on your acquisition debt only.

Acquisition debt is debt used to buy, build, or substantially remodel the home.

Let's suppose you bought the home for $150,000, with 10% down and a $135,000 conventional mortgage.  You have paid off $10,000 and the current remaining balance is $125,000.  You are not doing any remodeling.  In that case, your current acquisition debt is $125,000, so that is the amount of HELOC balance that has tax deductible interest, no matter what amount you borrow.  If you borrowed $150,000, then 83% of your interest would be tax deductible (125000/150000=0.833).  Even though the original purchase price was $150,000, and the current value might be $180,000, your acquisition debt is limited to the amount of the remaining balance of the purchase mortgage that you plan to refinance.

Or, same set of facts, but you borrow $150,000 and use the other $25,000 to remodel the kitchen.  In that case, you have $150,000 of acquisition debt, so all the interest is deductible.  

Also, for loans made in 2018, there is a maximum deductibility of $750,000 of mortgage or HELOC debt.