Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

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NovaPine
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Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by NovaPine » Mon Apr 27, 2020 2:09 pm

I need to have a major home improvement project taken care of this spring (sewer line replacement, $20k or so). For a number of reasons, I will probably need to use the contractor's in-house financing product, which will be a personal loan at about 7% interest for 5 years. (Reasons include - it's faster, it's easier, and it seems like a lot of lenders aren't doing HELOCs right now.)

At some point in the near-ish future, I may want to refinance this with a HELOC or home-equity loan to get a better rate and probably a lower monthly payment. But before I take the personal loan, I want to make sure I'm not messing anything up for tax purposes.

I understand that HELOC/HE loan interest is still tax deductible, but only if it is used to "buy, build or substantially improve the taxpayer’s home that secures the loan" and it's under a certain dollar amount. The idea, I gather, is that the home-mortgage deduction is supposed to be limited to money you spent on that house, not on paying off your credit cards or whatever.

My question is - If I get a HELOC/HEL and use the proceeds to pay off another loan, which itself was used solely to "substantially improve" my house, can I take the deduction on the new HELOC/HEL? Or does the HELOC/HEL have to happen at roughly the same time as the improvement?

megabad
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by megabad » Mon Apr 27, 2020 2:12 pm

My opinion is I think you cannot deduct but not 100% sure. You must already have a load of deductions to where this 20k loan is worth deducting.

Thegame14
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by Thegame14 » Mon Apr 27, 2020 2:37 pm

I would think NOT deductible, the loan needs to be taken out to pay for the improvements, not the pay off a loan, no matter if that loan was for improvements.

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CAsage
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by CAsage » Mon Apr 27, 2020 3:18 pm

I think you could deduct it - subject to all the other HELOC limitations, as there does not seem to be any reason that a refinanced HELOC or home mortgage isn't considered deductible. Just don't violate the "other" rules on what the money goes towards, I'd keep a copy of the total expenses (which you want for capital records anyway) and the first loan value.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

FoolStreet
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by FoolStreet » Mon Apr 27, 2020 3:20 pm

NovaPine wrote:
Mon Apr 27, 2020 2:09 pm
I need to have a major home improvement project taken care of this spring (sewer line replacement, $20k or so). For a number of reasons, I will probably need to use the contractor's in-house financing product, which will be a personal loan at about 7% interest for 5 years. (Reasons include - it's faster, it's easier, and it seems like a lot of lenders aren't doing HELOCs right now.)

At some point in the near-ish future, I may want to refinance this with a HELOC or home-equity loan to get a better rate and probably a lower monthly payment. But before I take the personal loan, I want to make sure I'm not messing anything up for tax purposes.

I understand that HELOC/HE loan interest is still tax deductible, but only if it is used to "buy, build or substantially improve the taxpayer’s home that secures the loan" and it's under a certain dollar amount. The idea, I gather, is that the home-mortgage deduction is supposed to be limited to money you spent on that house, not on paying off your credit cards or whatever.

My question is - If I get a HELOC/HEL and use the proceeds to pay off another loan, which itself was used solely to "substantially improve" my house, can I take the deduction on the new HELOC/HEL? Or does the HELOC/HEL have to happen at roughly the same time as the improvement?
I would certainly deduct the interest. He loan is for remodel and you will be refinancing from time to time. Who cares if it is a contractor LOcC, heloc, or refinancing from a 30yr mortgage

clydewolf
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by clydewolf » Mon Apr 27, 2020 3:29 pm

Home Equity Lines of Credit are deductible with some limitations: https://www.irs.gov/newsroom/interest-o ... er-new-law

Interest on a refinanced mortgage is deductible. The OP would be refinancing the loan.
See this from Lending Tree: https://www.lendingtree.com/home/home-e ... deduction/

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WoodSpinner
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by WoodSpinner » Mon Apr 27, 2020 4:59 pm

OP,

Do you Itemize Deductions ?

If not it’s a bit of a moot point. Still makes sense to pay down a 7% loan though!

WoodSpinner

MarkNYC
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by MarkNYC » Mon Apr 27, 2020 5:01 pm

NovaPine wrote:
Mon Apr 27, 2020 2:09 pm
My question is - If I get a HELOC/HEL and use the proceeds to pay off another loan, which itself was used solely to "substantially improve" my house, can I take the deduction on the new HELOC/HEL? Or does the HELOC/HEL have to happen at roughly the same time as the improvement?
Since the contractor's financing is a personal loan, the interest is not deductible. The interest on the HELOC may be deductible, but there are limitations: the HELOC must be obtained within 90 days of the completion of the home improvement work; and the amount of the HELOC that will qualify as acquisition debt where the interest is deductible will be limited to the amount of home improvement expenses incurred during the 24-month period ending on date of the work completion.

Especially under the new law, maintaining accurate records is important when deducting HELOC interest. See IRS Pub. 936 for more information related to what qualifies as home acquisition debt.

clemrick
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by clemrick » Tue Apr 28, 2020 8:48 am

Read the loan papers carefully. The construction finance company might put a lien on you house. When you pay off the loan, make sure the lien is also taken off your house.

Topic Author
NovaPine
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by NovaPine » Tue Apr 28, 2020 9:11 am

Thanks for all the great answers so far! Yes, I was torn between the logic of two different positions:

1. It's home-acquisition debt, so refinancing it should be deductible, just like a mortgage re-fi (even if the original loan here wasn't itself a mortgage/secured by the home)
OR
2. It's not deductible because the original personal loan was unsecured, so the second loan wasn't directly tied to the improvement
MarkNYC wrote:
Mon Apr 27, 2020 5:01 pm
Since the contractor's financing is a personal loan, the interest is not deductible. The interest on the HELOC may be deductible, but there are limitations: the HELOC must be obtained within 90 days of the completion of the home improvement work; and the amount of the HELOC that will qualify as acquisition debt where the interest is deductible will be limited to the amount of home improvement expenses incurred during the 24-month period ending on date of the work completion.

Especially under the new law, maintaining accurate records is important when deducting HELOC interest. See IRS Pub. 936 for more information related to what qualifies as home acquisition debt.
This makes sense to me. Thanks very much for the pointer to the IRS pub. The 90 days seems somewhat arbitrary, but it does seem reasonably consistent with my two conflicting positions -- like, the IRS doesn't necessarily care about the financial products to get where you're going, but they have to draw a line somewhere to figure out what's really home-acquisition debt, while also recognizing you might have to get the work done before your qualifying mortgage loan can come through.

If I squint at the IRS guidance, I can try to lawyer my way around it, but it seems like if I really care about getting the deduction safely, the 90-day deadline is where I should focus.

To answer some other questions - yes, I do itemize and have a lot of other deductions; and no, I guess it isn't a ton of money, but if I pay a few hundred bucks a year in interest, getting a third or so of that back from the IRS isn't nothing. Not worth an audit, obviously, but if it's not too much trouble, I might as well (particularly to improve the interest rate or other terms).

Topic Author
NovaPine
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Re: Tax deduction for HELOC/home equity loan used to pay off a personal loan I used for home improvement

Post by NovaPine » Tue Apr 28, 2020 9:11 am

clemrick wrote:
Tue Apr 28, 2020 8:48 am
Read the loan papers carefully. The construction finance company might put a lien on you house. When you pay off the loan, make sure the lien is also taken off your house.
I had not thought about this. Thank you! I will make sure to do that and make a note to check the lien, if there is one.

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