Maximizing Home Interest Deductions Under Current Tax Law
Under current tax regulations, homeowners may still have opportunities to deduct home equity loan interest—if the funds are used appropriately.
Understanding the Rules: The IRS allows deductions on "qualified residence interest" for a primary residence and one additional home, such as a vacation property. However, the deductibility depends on whether the loan qualifies as acquisition debt or home equity debt:
Acquisition Debt – This includes loans used to buy, build, or substantially improve a home. Prior to the Tax Cuts and Jobs Act (TCJA), interest on up to $1 million of acquisition debt was fully deductible. For debts incurred after December 15, 2017, the deduction limit is $750,000 through 2025.
Home Equity Debt – This applies to other loans, such as home equity lines of credit (HELOCs). The TCJA suspended interest deductions on home equity debt from 2018 through 2025, unless the loan is used for home improvements.
A Strategic Tax Loophole: By using home equity loan proceeds for substantial home improvements (e.g., finishing a basement or adding a deck), the debt may qualify as acquisition debt—making the interest deductible.
Qualifying Home Improvements: The IRS suggests that the following expenses may be eligible for interest deductions:
Building an addition to your home
Installing a new roof
Replacing the HVAC system
Remodeling the kitchen or bathroom
Resurfacing the driveway
Tip: Minor repairs generally do not qualify for this deduction.
Planning Ahead: To maximize deductions, homeowners should carefully structure their loans and document how the funds are used. With the TCJA provisions expiring in 2025, it's wise to consult with legal and tax professionals to leverage these benefits while they are still available.
Reference: Small business tax strategies. Small Business Tax Strategies RSS. (n.d.). https://www.smallbiztax.net/
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