About Home Equity Line of Credit Tax Deductibles

A mortgage does come with a few tax deductions. A HELOC (home equity line of credit) offers a few tax deductions as well. A HELOC is a loan taken out against the equity that you have built up in your home over time. The loan is considered a line of credit because you can withdraw varying amounts as needed, up to a certain limit specified by the lender.

Significance

The interest paid on the home equity line of credit is tax deductible. Other types of loans like those on vehicles and credit cards are not tax deductible. However, the HELOC is used to buy a car or to pay off credit cards. This makes the interest from paying off those purchases tax deductible.

Features

To qualify as a tax deductible interest, the HELOC must be backed by the borrower's first home or primary residence. The qualifying home equity line of credit debt must be less than $100,000 or the home's market value minus the purchase price. (The smallest number is the limit.)

Special Considerations

The amount of the HELOC that is more than the $100,000 limit can be tax deductible if it is invested in a business and rental property. Interest deductions become an issue if the home that is backing the loan is not an actual home. It may be a business or rental property. Only the amount of the HELOC taken on the home is tax deductible as home equity debt interest.

Grandfather Clause

HELOCs before October 13, 1987 are considered grandfathered debt. Only the amounts borrowed before the deadline are grandfathered. The $100,000 limit does not apply. There is no limit on grandfathered loans. The rest falls under the $100,000 limit. Otherwise, the loan is tax deductible.

Acquisition Debt

A HELOC that is used to rehabilitate or add to a home qualifies as acquisition debt. This debt has a $1,000,000 limit on the loan amount that can qualify for interest. The new addition or renovation must provide a substantial change to the home.