Is a 30 year home equity loan’s interest tax deductible

7 Replies

Looking to do a cash out refinance on my paid off primary residence. A 30 year home equity loan is cheaper and better interest rate, are the interest tax write off’s the same as a traditional 30 year mortgage?

Thank you for any feed back!! -Gregg

Originally posted by @Gregg Romig :

Looking to do a cash out refinance on my paid off primary residence. A 30 year home equity loan is cheaper and better interest rate, are the interest tax write off’s the same as a traditional 30 year mortgage?

Thank you for any feed back!! -Gregg



Home equity indebtedness interest is generally not treated as qualified residence interest for years 2018-2025 so they are not deductible.  Even when it was deductible, the amount of loan qualified for deduction was capped at 100k.  

 

Originally posted by @Gregg Romig :

@Ashish Acharya

Thank you very much that helps, first time pulling cash out this house. It will be a rental so I guess the cash out refinance rather than home equity loan is a better idea due to the tax benefits.

Oh! Different rules apply if you are using the loan for rental or business or investment. I was responding under the assumption that you wanted to replace/refi our normal mortgage with HELOC for your primary residence.

 

Originally posted by @Gregg Romig :

@Ashish Acharya

Thank you very much that helps, first time pulling cash out this house. It will be a rental so I guess the cash out refinance rather than home equity loan is a better idea due to the tax benefits.

 Deductibility follows use per IRS rules. Even if it is a rental property that doesn't automatically mean you can just pull money out and claim the interest. You need to show qualified business use of the funds. Cash out refinance and home equity loan are treated the same for deductibility purposes. Have your tax professional review what you are doing. You want to be careful with this.

Originally posted by @Gregg Romig :

@Joe Splitrock

I am going to do a cash out refinance, thank you for the info!!

 I am not sure you understood my point. When you convert a primary residence to rental, you need to establish basis for depreciation. That is the lower of either:

A. Original purchase price plus capital improvements

B. Market value

Pretty much guaranteed in your case that option A will be a lower value.

If you plan to expense the interest on the cash out refinancing, the cash out value cannot exceed 100% of the basis. In other words, you can't deduct interest for more than the purchase price against the property. 

If you end up with more cash back than the basis (original purchase price plus capital improvements) then you need to prorate the interest. For example if you originally paid $75,000 for the property and financed $100,000 against the property, then only 75% of the interest is deductible. 

If you wanted to deduct the interest for the portion over purchase price, then you need to prove that additional cash out was used for investment purposes AND you deduct that portion against the property where the cash is used. For example if you take the extra $25,000 and use it as a down payment on another property, then you take 25% of the interest as an expense against the other property.

If you used that $25,000 to buy a new car, that interest portion would not be deductible.

Additional rules come into place if you are refinancing. The point is you cannot double dip interest. Otherwise people would just keep refinancing as a way to manufacture interest expenses. The money has to be used on a new investment and tracked accordingly. 

The rules are the same for HELOC or cash out refinance for tax purposes. It can be a little complex on your taxes so I recommend a tax professional who understands rental properties.