How to keep HELOC interest tax-deductible

Finance Tax
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The new tax bill reduces the maximum amount of mortgage debt for which one can claim itemized interest expense deductions from $1 million (or $500,000 for married filing separate status) to $750,000 (or $375,000 for married filing separate status). This change doesn’t affect home acquisition mortgages taken out under binding contracts in effect before Dec. 16, 2017 as long as the home purchase closes before April 1, 2018.

The final bill also suspends (eliminates) the deduction for interest arising from home equity indebtedness for taxable years beginning after December 31, 2017 and through December 31, 2025.

Sources:

The bill does not specifically refer to HEL or HELOC though, using “home acquisition indebtedness” and “home equity indebtedness” terminology. Thus, if HELOC was opened to acquire a first or second residence or to refinance debt that originated from such purchase, it is still considered “home acquisition indebtedness”. What about subsequent draws? Again, probably depends on how proceeds are used… What about a temporary repayment with the intention to draw the funds again?

For example, if one has capital used for investments, and it is available between some trades, rather than keeping it in a deposit account during such times and earning next to nothing in interest, it can be used to pay down temporarily HELOC and reduce interest charged - will it no longer be considered “home acquisition indebtedness” if funds are re-drawn a few days later? Weeks? Months? That’s what I wonder…

Obviously the portion of HELOC debt that is considered “home acquisition indebtedness” cannot exceed the original mortgage amount that was refinanced (if that’s how this debt originated), and also cannot exceed the limits mentioned in the first paragraph above. Does it have to decrease over time though? I don’t see why… The principal balance of interest-only mortgage does not decrease, so why would HELOC be different? If min payment is defined as a % of current balance, nothing is stopping borrowers from drawing an equal amount from the HELOC itself prior to making each payment, thus preserving the entire balance as “home acquisition” debt…

I am not an accountant and interested in what smarter people have to say on this.

Of course, I realize that with the newly doubled standard deduction, this whole discussion is purely theoretical for vast majority of people.

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Should this be moved into the Tax sub-forum that you requested they create?

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Sounds like that excludes renovations and additions. That sucks.

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Refinanced home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later).

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EugeneV: Can you confirm my understanding. I have a ARM that is going to get reset in about 11 months. I want to refinance it with a HELOC. Basically say mortgage balance is $100K. I’ll take a HELOC for $100K and pay off original mortgage. That interest on HELOC should be deductible right?

Also say i get HELOC for $125K but only use $100K of it to pay off existing mortgage. And later say i use the remaining $25K line for other purpose not related to home improvment. I can still deduct interest on $100K right? I just have to do the math and split out the interest on $25K

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That’s my understanding, though it does not mean much.
Moreover, if your mortgage balance is above 100k, I don’t think your HELOC is limited to 100k either… should be up to 750k for most people…

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Additions are not an acquisition?

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thanks EugeneV. For some reason i thought current HELOC int deduction is limited to upto $100K, and that remains in place. Anyway - my heloc will be indeed about $100K - so either way i’m fine.

i guess we’ll need to wait a bit for IRS or whoever to clarify this. If it is indeed what you’re thinking, i wonder though how IRS would know how you used the money from HELOC? especially for heloc that was taken out say few years back.

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I called the IRS Help Line. The rep agreed with me that my question is not fully answered by Pub 936 and recommended getting a professional opinion. However, his own opinion was that once a HELOC balance (or some portion of it) qualifies as home acquisition debt (e.g. because it originated from refinancing another mortgage which qualified), it will retain this status indefinitely. I still have my doubts though.

Here are the relevant definitions and examples from Pub 936:

Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It also must be secured by that home.

Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt.

You build or improve your home and take out the mortgage before the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage.

You build or improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage.

So based on this, if drawing HELOC is equivalent to taking out mortgage, you would have to draw it within 24 months before the work is completed or 90 days after for it to be considered home acquisition debt. Still, it does not address my situation.

Another similar scenario is paying it off temporarily using another loan, e.g. credit card balance transfer check, private loan, or what have you. Such loan in itself is not secured by the home and therefore does not qualify. Subsequently, drawing funds from your HELOC to repay such loan may or may not qualify… Again, according to the rep I spoke to, it qualifies up to the original refinance amount (and 100k extra for 2017 only, but not going forward based on the current legislation), and the alternative possibility is that the amount repaid and subsequently re-drawn would lose the status of home acquisition debt regardless of how short that period may have been. I don’t see anything supporting a maximum duration required to preserve the status, similar to 90 days to undo the IRA re-characterization, of example (which, too, is going away).

I think I am more likely to find an accountant intelligent enough to answer my question on this forum than in real life…

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Still hoping to hear some expert opinions, but my further thoughts are based on the following:

So, if you repay some or all of your HELOC debt previously qualifying as home acquisition, using unsecured debt (e.g. credit card balance transfer check, private loan from friends and family, etc), or debt secured by something other than your home (e.g. margin loan) and at a later time draw HELOC again to repay that debt, the new HELOC balance should qualify again as home acquisition debt at least up to its previous balance.

However, if you pay off or pay down your HELOC debt using your own funds (rather than borrowed money), I do not see how such logic would apply, and you may be SOL. In other words, in order to preserve the status, the debt must exist in some form, whether it is secured by the home or not. If it ceased to exist at some point, it may be hard to argue that any new debt, even secured by the home, can somehow retain the home acquisition status of the original debt that had been paid off.

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I’m seeing a bunch of blogs now confirming that home improvements are considered to be acquisition debt by the IRS. Glad to hear this.

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Glad for that and thanks for all the updates guys.

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Alas, I got hit with AMT, and can’t deduct any mortgage interest for 2017, HELOC or not, since it did not result from buying or improving my home. Without AMT, 2017 would have been the last year when it’s deductible regardless of the purpose, on balances up to 100k.

Going forward, in a situation where HELOC balance qualifies as acquisition debt, interest should continue to be deductible even under AMT, as far as I understand…

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Since refinancing deductible HELOCs (or mortgages) do not wipe out their eligibility for interest tax deduction, might refinancing HELOCs with low CC interest offers (eg. 1% BT fee for 12 months) keep that?

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Highly unlikely.

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Not sure why you would want to do that, but you’d have to find a way to secure the credit card with your home.

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Good point, not sure what I was thinking.

I guess one would have to pay off one HELOC, but draw the same amount from another HELOC for this to work.

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Promo APR on CC may be worth it.

Using it to pay off HELOC preserves home acquisition status of the debt. It is not deductible because it’s not secured by the home, but down the road it may be paid off with the same or a different HELOC and still preserve the status… and become deductible again.

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Would be interesting to see how the home acquisition status is preserved, and if direct account to account transfers are required.

Or if they treat money as fungible and don’t care how the debt has been transferred as long as the balance of the home acquisition debt is preserved.

For #2, it would allow things like paying off the HELOC with funds from your bank account, then drawing on another HELOC to replenish that account with the same.

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