What Is a Home Equity Loan Tax Break Credit?

Things have changed in the past year for people with a home equity loan. The new Tax Cuts and Jobs Act of 2017 has limited the ability of homeowners to deduct interest on an equity loan from their income taxes. Some borrowers, however, can still take advantage of the tax break credit. To answer any questions you may have about the changes in the law, let’s look at what an equity loan is and the circumstances under which you can still deduct the interest.

What Is Home Equity?

Equity refers to the amount of money that you’ve already paid off on your mortgage loan. It is calculated by subtracting the amount that you still owe on your mortgage from the value of your home. For example, if your home is worth 150,000 dollars and the amount you owe on your mortgage is 130,000, your equity is 20,000 dollars. Home equity is an asset that you can borrow against; in the above example, if your home equity is 20,000, you can take out an equity loan in any amount up to 20,000. The money that you borrow with your home equity can be put to whatever purpose you choose: paying off credit cards, taking a vacation, buying a car, or making renovations to your home.

How Has the Tax Law Changed in Regard to Home Equity?

In the past, when you took out a loan against your home equity, you could deduct the interest that you paid on the loan from your income taxes. Now that interest is tax deductible only if the loan is used for one of two purposes:

  • Improving your current home
  • Buying a second home

You can still use the loan money however you choose, but the interest is no longer tax deductible if you use it for “personal” expenses.

With changes to the tax laws, you need professionals like GovDocFiling to guide you through the process of submitting federal tax forms. See this form for an example of tax ID format, or click the following link for a EIN number application.

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