Is a HELOC on primary residence tax deductible?

[Texas Roger · Accepted solution]

Interest on home equity loans or lines of credit are still deductible, but only if the loan is used to buy, build, or substantially improve the home and the total mortgage doesn’t exceed $750,000.

If the loan proceeds are used for something else (for example, to pay off debt) in 2018 through 2025, the interest is not deductible.

See this FAQ: https://ttlc.intuit.com/questions/4482873-which-federal-tax-deductions-have-been-suspended-by-tax-re...

[sibbs]

What if you're only combining a first and second mortgage,  is that "buying" under this definition?

[Texas Roger]

Is it a home equity line of credit or a conventional mortgage?

[sibbs]

combining a 1st and 2nd mortgage into one Home equity line of credit.    option A no other debt paid off,  option B  pay off credit card debt, the first and second mortgage,  in that case would I need to keep track of the interest ratio of home mortgage payoff vs debt?

[Opus 17]

Acquisition debt is debt that was used to buy, build, or substantially remodel your home.   It doesn’t matter what form the acquisition debt is in.

 For example, if you bought your home with a combination of conventional mortgage and HELOC, then that is all acquisition debt.  Let’s say you bought your home for $100,000 with a $75,000 mortgage, a $20,000 HELOC, and $5000 cash down payment. You have $95,000 of acquisition debt.   You pay that down to $90,000 over the first couple of years.  Then you re-finance for $120,000.   Only $90,000 is acquisition debt, unless you use the balance of the refinance to substantially remodel the home.

[sibbs]

Thank you.   So in this case I have a first mortgage to build the house,  2nd mortgage came when I finished the basement and built a detached garage.   so all of which would be considered acquisition debt.  Rolling those 2 mortgages into a single home equity line of credit if I paid nothing else off would still allow me to be able to deduct the interest on the heloc loan.  

[Opus 17]

Make sure you keep good records for as long as you own the house plus 3 years after you sell (7 years is better).  If the first mortgage was used to buy the house and the entire second mortgage (except for closing costs) was used for improvements, then both mortgages are acquisition debt and if you refinance them together as a new instrument, that amount of debt will still be considered acquisition debt, no matter what kind of debt instrument it is.  Anything extra you take out (except for closing costs) will be considered equity debt and the interest is not deductible.

[tomchang75]

Hi,

My question is is Home equity interest paid from my main home used to purchase a rental property tax deductible? Does this qualify ?

[JotikaT2]

Yes.

You would be able to deduct the mortgage interest expense related to your Schedule E to offset your rental income instead since this interest is related to this rental property.

Since the rental property is not related to your home, you would not be able to deduct the mortgage interest as an itemized deduction. 

[Edited 3/8/2020|2:36pm PST]

[MikePrime108]

Lets say you get a heloc and you make a 25k draw to lock in the 'introductory' rate.  For example, you draw it as cash into a checking account then pay for home improvements using that checking account, does that sill count?  If so what kind of documentation would I want to save here?  I'd hate to lock in a introductory rate, only to find its not tax deductible.

[NCperson]

@MikePrime108 as long as you have supporting documentation that the money was used on home improvements that extend the life of your home, and you don't exceed $750,000 in total debt (including the first mortgage), you'll be fine.