In certain circumstances, you may still be able to write off interest paid on your home equity loan or home equity line of credit (HELOC) despite changes to the tax code. For instance, the IRS states that interest paid on a home equity loan (HELOC) used to “buy, build, or substantially improve” the residence used as security for the loan is deductible from taxes. That represents a significant departure from previous years when, regardless of the purpose of the funds from the home equity loan, the interest was tax deductible. Similar to previous legislation, the taxpayer’s primary residence or secondary residence (qualified residence) must serve as security for an eligible home equity loan or HELOC. It must not exceed the cost of the home and must meet other requirements as well. For the 2018 tax year, joint taxpayers can only write off interest on up to $750,000 in “qualified residence loans.” ” This is down from the previous limit of $1,000,000. For married taxpayers filing separately, the new limit is $375,000, down from $500,000 previously.
Interest on home equity loans taken out for personal purposes, like holidays or credit card debt repayment, is no longer deductible. Home improvements that “add to the value of your home, prolong your home’s useful life, or adapt your home to new uses” are permitted, according to the IRS website. “Repairs that maintain your home in good condition, such as repainting your home, aren’t substantial improvements,” the IRS clarified. On the other hand, you can deduct the cost of painting from the cost of the improvements if the painting is done as part of a renovation that significantly enhances your qualified home. ”.
Ah, the elusive world of taxes It’s a labyrinth of forms, deductions, and regulations that can leave even the savviest homeowner scratching their heads One such head-scratcher is the question of whether a Home Equity Line of Credit (HELOC) qualifies for a 1098 form and, consequently, a juicy tax deduction. Buckle up, folks, because we’re diving deep into the murky waters of HELOC interest deductions and emerging with clarity (and maybe a few tax savings!).
The 1098 Form: Your Gateway to HELOC Interest Deductions
Before we delve into the specifics of HELOCs and their 1098 connection, let’s first understand what this mysterious form is all about. The 1098, officially known as the Mortgage Interest Statement, is a document your lender sends you at the end of each year. It details the amount of interest you’ve paid on your mortgage, home equity loan, or HELOC throughout the year. This crucial piece of paper is your golden ticket to claiming the home mortgage interest deduction, a tax break that can significantly reduce your tax burden
So, Does a HELOC Get a 1098?
The answer is a resounding yes! Your friendly neighborhood HELOC lender will indeed send you a 1098 form each year, just like they would for your regular mortgage This means you have the potential to deduct the interest you paid on your HELOC, but there’s a catch (isn’t there always?)
The Catch: Not All HELOC Interest is Deductible
Although the 1098 allows for possible tax savings, those savings are not guaranteed. A wrench was thrown into the works by the Tax Cuts and Jobs Act of 2017, which limited the amount of interest that could be deducted from home equity loans and HELOCs. Here’s the lowdown:
- You can only deduct interest on the first $750,000 of qualified residence loans. This includes your mortgage, home equity loan, and HELOC combined. So, if your mortgage balance is already at $750,000 or more, you’re out of luck.
- The interest must be used for “qualified” expenses. This means you can only deduct interest if you use the HELOC funds to buy, build, or substantially improve your home. Using the funds for other purposes, like consolidating debt or taking a vacation, won’t qualify for the deduction.
- You must itemize your deductions. This means you can’t take the standard deduction and also claim the home mortgage interest deduction. You’ll need to choose one or the other.
Navigating the HELOC Interest Maze: A Step-by-Step Guide
Alright, so you’ve received your 1098 form and you’re eager to claim that sweet, sweet deduction. But how do you navigate the maze of regulations and requirements? Here’s a step-by-step guide to help you out:
- Gather your paperwork. This includes your 1098 form, receipts for any home improvements you made with the HELOC funds, and your mortgage statement.
- Determine your eligible interest. Calculate the amount of interest you paid on your HELOC that qualifies for the deduction. Remember, only interest used for “qualified” expenses counts.
- Check your loan limits. Make sure your total mortgage debt (including your mortgage, home equity loan, and HELOC) doesn’t exceed $750,000.
- Decide whether to itemize. Compare the standard deduction to the total of your itemized deductions, including the home mortgage interest deduction. Choose the option that results in the lowest tax liability.
- Claim the deduction on your tax return. If you’re itemizing, you’ll report the eligible HELOC interest on Schedule A of Form 1040.
Frequently Asked Questions (FAQs)
Q: Does it matter when I took out the HELOC?
A: No, the new rules apply to all HELOCs, regardless of when you took them out.
Q: What if I used the HELOC funds for a mix of qualified and non-qualified expenses?
A: You can only deduct the interest that corresponds to the qualified expenses. The percentage of money used for each purpose must be determined, then added to the total interest paid.
Q: What if I don’t have enough itemized deductions to make itemizing worthwhile?
A: Unfortunately, you won’t be able to claim the HELOC interest deduction in this case. You’ll need to take the standard deduction instead.
The Bottom Line: HELOC Interest Deductions Can Still Save You Money
While the rules surrounding HELOC interest deductions have become more complex, they can still offer significant tax savings for homeowners who use the funds wisely. By understanding the requirements and carefully planning your HELOC usage, you can maximize your deduction potential and keep more of your hard-earned money in your pocket.
Examples of home equity loan expenses that not are eligible for deducting interest
Paying off credit cards
Keep track of all labor and material invoices and receipts when deducting interest paid on a home equity loan or home equity credit (HELOC). You’ll need them in case you ever get audited. Before tax time, you should receive an IRS Form 1098 (Mortgage Interest Statement) from your lender or lenders. The interest you paid on your principal mortgage, home equity loan, or home equity line of credit during the previous year is displayed on this form. Contact your lender if you haven’t received it.
Examples of home equity expenses eligible for tax-deductible interest
Replacing the roof or siding
Building on room additions
Electrical or plumbing upgrades
New driveway or walkways
Adding on a new deck