Tax benefits of using a HELOC (Home Equity Line of Credit)

By Kate Gillan | Citizens

Home equity lines of credit, or HELOCs, are gaining in popularity as an opportune choice to fund life goals instead of taking on more traditional forms of debt such as a personal loan or credit card. Come tax season, there will be many factors to consider when filing. This article will outline some helpful resources for you to get the most advantages when it comes to a HELOC. Let’s dive straight into some common questions many homeowners share.

What is a HELOC?

You may be already familiar with a HELOC or have taken one out in the past. But if you’re new to using this unique and savvy source of funding, keep reading. A HELOC might just be something that could be a good fit for your house goals. According to the New York Federal Bank, “Balances on home equity lines of credit increased by $9 billion, and now stand at $349 billion in aggregate.” In short, interest in HELOCs is rising.

Let’s dive into the details of what a HELOC entails. A HELOC is a line of credit that uses the equity you have in your home as collateral. It’s a revolving line of credit, similar to a credit card, that allows you to draw money as you need it. Since HELOCs are secured against the equity of your home, they tend to offer lower interest rates than other borrowing options like credit cards or personal loans.

What are the tax benefits of having a HELOC?

The Tax Cuts and Jobs Act of 2017 allows homeowners to deduct the interest paid on a home equity line of credit if the borrowed funds are used to buy, build, or substantially improve the residence. So, if you used a HELOC to pay for your kitchen renovation or new bathroom, the respective HELOC interest payments can be written off your income taxes. It’s important to note that you cannot deduct interest associated with HELOC funds that were used for anything other than buying, building, or substantially improving the property in which the equity is the source of the loan.

Though it varies by lender, you can typically borrow up to 85% of the value of your home minus the amount you owe. In addition to the amount of equity you have, lenders will also look at factors like your credit score, employment history, monthly income, and monthly debts.

How does timing work for a homeowner interested in a HELOC?

Since the tax law changed in 2017, the rules on the tax deductibility of interest paid differs for home loans before and after December 15, 2017. Here’s the breakdown:

• For mortgages or HELOCs taken out after December 15, 2017, the IRS allows you to deduct up to $750,000 ($375,000 if married filing separately) of your interest payments as long as the funds were used to “buy, build, or substantially improve.” It’s important to note these limits apply to the combined home mortgage debt – inclusive of any mortgage or HELOC.
• For mortgages taken out before Dec 16, 2017, interest is fully deductible on a combined mortgage and HELOC balance total of $1 million if single or married filing jointly ($500,000 if married filing separately).

Is a HELOC worth it if I can't deduct the interest?

Regardless of potential tax benefits, a HELOC offers homeowners a way to borrow money at a typically lower interest rate than unsecured options like a credit card or personal loan. Homeowners can use this money to pay down high-interest credit debt and take advantage of the lower interest rate a HELOC could offer. A HELOC also may make sense for those looking to pay for lump some expenses like private school or a wedding. Either way a HELOC offers you the flexibility to pay for a range of life goals.

Let's talk next steps

To recap, there are a lot of smart ways to use a HELOC. You may be interested in a home improvement, want to consolidate debt, or be buy an investment property. Before deducting anything, be sure to review your situation with a tax expert. You’ll also want to check with your advisor, or do your research, but keep in mind a HELOC can provide great flexibility when purchasing or improving a home, consolidating debt, or funding college.

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If you are taking on a renovation project, consolidating high-interest debt or you just want a worry-free getaway, a Citizens HELOC can help you right now. And our home equity specialists are here to help guide you.

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