When Is Home Equity Debt Deductible?

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Americans have been whipsawed as the new tax code begins to come into effect. Are state and local taxes deductible? How about mortgages? Money left in wills? The taxation of small businesses? One of the tax deductions many people could have is for home equity loans. However, the definitions are tricky.

Last year, credit rating agency TransUnion forecast that 10 million people would take out home equity loans in the four years after the date of its prediction. Among the reasons are that, as home values have surged from the housing collapse, people simply have more to borrow against. Among the things that may slow the process, and the amount of the value of home equity loans nationwide is that banks are still reluctant to allow homeowners to take on more debt, in particular against the value of their homes. It usually takes a strong credit score for a bank to even consider these loans.

The definition of loans which qualify for tax deductions is narrow. According to Realtor.com:

For starters, it’s important to understand the concept of “acquisition debt” versus “home equity debt.”

“Acquisition debt is a loan to buy, build, or improve a primary or second home and is secured by the home,” explains Amy Jucoski, a certified financial planner and national planning manager at Abbot Downing.

That phrase “buy, build, or improve” is key. Most original mortgages are acquisition debt, because you’re using the money to buy a house. But money used to build or renovate your home is also considered acquisition debt, since it will likely raise the value of your property.

Home equity debt, however, is something different. “It’s a home equity debt if the proceeds are used for something other than buying, building, or substantially improving a home,” says Jucoski.

This distinction is clear enough so that most people who do their own taxes should understand it, and apply it correctly. Certainly, all tax accounts do.

Homeowners are up against one of the most complicated tax seasons a year. “Home equity” deductions may help tens of thousands of people who can no longer take state and local deductions. That is if people know that the loans really are.