For the millions of Americans who use their homes as a personal bank in the form of home equity loans – also know as a HELOC (Home Equity Line Of Credit) – the new tax legislation signed into law last month has an unwelcome surprise.
Under the new law the interest paid on home equity loans will no longer be tax-deductible. However interest on a HELOC loan that is obtained to acquire, build or substantially improve the residence will remain deductible.
Historically, borrowers could deduct home equity interest on loans up to $100,000 ($50,000 for married people filing separately). And unlike the deduction for interest on primary mortgages, home equity deductions are disappearing for both new and existing borrowers. No loans will be grandfathered.
In the past, homeowners have used their home equity to get low, tax-deductible interest rates for a myriad of reasons such as a large purchase, debt consolidation, or financing a college education. Because HELOC loans are secured by real estate, rates on these loans are considerably lower than rates for an unsecured loan. A homeowner scores a lower interest rate and was able to to deduct the interest from their taxes. The new law closes this “loophole” for using home equity as a cheap source of consumer financing.
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