Introduction

Home Equity Line of Credit (HELOC) interest can be a significant expense for homeowners. However, under certain circumstances, this interest can be tax deductible. In this article, we will explore the nuances of HELOC interest deduction, specifically in the context of the 2019 tax season. Understanding these rules can help you make informed financial decisions and potentially reduce your tax burden.

Do I Qualify for HELOC Interest Deduction in 2019?

The good news is that you are correct in understanding that you will receive a 1099 INT from your bank, which will be shared with the IRS. But, to qualify for a tax deduction on the interest paid on a HELOC, you need to meet certain criteria.

Use of Loan Funds

The primary criterion for qualifying a HELOC or home equity loan for tax deduction is the specific use of the funds. The funds must be used to buy, build, or substantially improve your primary or secondary home that secures the loan. If the money is utilized for other purposes, such as paying off credit card debt or personal expenses, the interest is not deductible.

Loan Limits

There is a cap on the amount of debt eligible for the interest deduction. For individuals who are married and filing jointly, the total mortgage debt, including the primary mortgage plus any home equity loans or HELOCs, cannot exceed $750,000. For single filers or married filing separately, the limit is $375,000. These limits apply to loans taken out after December 15, 2017. For loans taken out before this date, the limits are $1 million and $500,000, respectively.

Itemizing Deductions

To claim the deduction, you must itemize deductions on your tax return. This means that the total of all your itemized deductions, including mortgage interest and HELOC interest, should exceed your standard deduction to be beneficial.

Mortgage Qualifications

The mortgage must be secured by your primary or secondary home. Unsecured debt, even if used for home improvements, does not qualify for the interest deduction.

Grandfathered Debt

For those with mortgages in place prior to the Tax Cuts and Jobs Act of 2017, the rules may differ. These older mortgages are often referred to as grandfathered debt. Consulting with a tax professional is crucial to understand how these rules apply to your specific situation, given the complexity of tax laws and potential changes over time.

Can I Deduct HELOC Interest for Improvements and Debt Consolidation?

The rules around HELOC interest deduction can be nuanced. Here's a breakdown of how different scenarios can affect your eligibility:

Improvements

Yes, if you use 100% of the HELOC to improve your home. The funds must be used to make necessary or cosmetic improvements that enhance the value of the property. This is subject to the $750,000 debt limit for joint filers or $375,000 for single filers.

Debt Consolidation

No, unless the money from the HELOC is specifically used to pay off other debts associated with personal or non-business purposes. Debt consolidation is not considered an improvement to the home, hence the interest is not deductible.

Mixed Uses

It's a gray area and depends on the exact application of funds. You would need to follow the IRS debt tracing rules to determine the eligibility for the deduction. If you have a mix of uses (e.g., some funds for home improvements and some for other purposes), consulting a tax professional is advisable.

Final Thoughts

Successfully deducting HELOC interest requires careful consideration of the rules and specific circumstances. Consulting with a tax professional is recommended to navigate the complexities of the tax laws, especially as they can change over time.

Related Keywords: HELOC, tax deduction, home equity loan

Resources:
IRS Topic 586: Home Mortgage Interest Deduction
IRS: About Itemized Deductions