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You Can't Use a Home Equity Line as a Tax Deductible Piggy Bank Anymore - But That Doesn't Mean There Isn't a Deduction

April 5, 2018

 

Once known simply as a second mortgage in a by-gone era when the Greatest Generation put themselves into hock to fund their Baby Boomer's college education or to raise the cash just to get by day-to-day before the ubiquitousness of credit cards, the second mortgage was re-packaged as a "home equity loan". "Home equity" implied the borrower was merely tapping an asset, rather than adding net debt as in a "second mortgage". "Home equity" sounded trendier. And as a bonus, whether you called it a home equity loan or a second mortgage, mortgage interest was tax deductible! And after the tax reforms of 1986 eliminated the deductability of credit card interest, banks heavily marketed the home loans to consumers as a way of rolling over high interest tax-disadvantaged debt to lower interest tax deductible debt. 

 

This backfired during the gung-ho years of the Housing Bubble of 2000-2007 when homeowners funded just about everything under the sun with home equity credit lines, including lavish vacations. Unfortunately when home values plummeted after 2008 and the Great Recession hurt job prospects around the country, many upside-down homeowners with home equity credit lines went bust. It was this experience that no doubt made it possible to reign in home equity credit lines on tax returns in the Tax Cuts and Jobs Act of 2017 when Congress was looking for ways to help pay for sharp decreases in business taxes. 

 

No worries--home equity interest is still tax deductible--but only if it is used for actual home improvement. You can't use it to roll over credit card interest or car loans anymore, at least to the extent of getting a tax deduction for it on your tax return, but that kitchen renovation, new garage, or in-ground pool is still a go. Congress reduced the total balance permissible for interest tax deduction treatment to $750,000, so be sure to evaluate your project cost and your current first mortgage balance together when making financial decisions. 

 

Congress put in a sunset provision making the limitation on mortgage interest revert to pre-2017 levels after 12/31/2026. You can read all about it in the IRS' bulletin on the issue here. Have more questions? Email us at inquiry@njcpaccounting.com and we'll be sure to get you some answers.

 

 

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