Are we we still able to deduct home equity line of credit interest on our taxes going forward?

[Opus 17 · Accepted solution]

You can deduct interest you pay on any mortgage, no matter the legal format, up to the amount of acquisition debt.

Acquisition debt is debt used to buy, build, or substantially improve your home.

For example: You buy a home for $100,000 in 2009 with an $80,000 mortgage.  In 2017, your mortgage balance is paid down to $65,000.  You refinance for $125,000 and use $10,000 to remodel the kitchen.  Your acquisition debt is (65K+10K) = $75,000, so you can deduct 75/125th or 60% of your interest.

It doesn't matter if you got a new refinanced mortgage for $125,000, or if you kept the original mortgage and took out an HELOC for $50,000.  Either way, you now have $125,000 of total debt, of which $75,000 is acquisition debt and $50,000 is equity debt.

Also note that there are additional limitations in "retroactively" paying for improvements.  Debt only counts as acquisition debt if the loan is taken out 2 years or less before the purchase or improvements are completed, up to 90 days after the purchase or improvements is completed.  If you take out an equity loan in 2018, and want to say that the kitchen remodel you did in 2017 for cash, is actually part of your acquisition debt, you can't.  You would have to take the debt out before the work or within 90 days of completing the work.

You can figure your total interest deduction by looking at each month individually or by using the first month/last month method.  In the above example, in January 2018, you have $75,000 of acquisition debt and $125,000 of total debt, so the deductible percentage is 60%.  You can assume you pay off equity debt first, so in December 2018 you have $75,000 of acquisition debt and $115,000 of total debt, so your percentage of acquisition debt is 65.2%. Averaged together, your deductible interest for the year is 62.6%.

I think Turbotax will probably help with the calculation, but I haven't seen next year's version yet.

[DoninGA]

Yes, but with limitations.  See this TurboTax support FAQ for the 2018 tax code changes - https://ttlc.intuit.com/questions/4482394-how-will-tax-reform-affect-my-2018-federal-tax-return

[TomD8]

The key difference under the new law is that now, HELOC interest can be deducted only if the proceeds are used to "buy, build, or substantially improve" the taxpayer's home that secures the loan.  The interest can no longer be deducted, as it could in the past, if the loan proceeds are used for other purposes.

Also, now taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return.  These are lower limits than under the "old" law

https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

[Opus 17]

However, the new maximum loan amount of $750,000 only applies to loans taken out after 1/1/18.  Loans taken out before 1/1/18 are grandfathered into the $1 million limit.  (However, interest on equity debt is still not deductible even for equity loans taken out before the law changed.)