Home Equity Debt - Code Sec. 163(h)(3)(C)
For Years Before 2018
Home equity interest was deductible for debt secured by a taxpayer’s principal or second home. The total equity debt on the TWO HOMES couldn’t be more than:
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$100,000 ($50,000 for married separate - Code Sec. 163(h)(3)(C)(ii)), or
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The difference between the acquisition debt on the home and the FMV of the home, if smaller.
There was generally no limitation on the use of home equity debt proceeds; the funds could have been used to purchase a car, pay personal debts, etc., and before 2018 the interest on the debt was still deductible on Schedule A within the limits above. Caution: Home equity debt was NOT deductible against the AMT (See home mortgage interest and AMT later in this chapter).
For Years After 2018
The deduction for home equity debt interest is no longer allowed. This applies to both primary and second homes and includes home equity debt incurred prior to 2018.
Commentary
This law change can have an adverse impact on individuals who used their home as a piggy bank for personal expense purposes. Where the home loans have been refinanced and are partially acquisition debt and partially equity debt, tax preparers will still have to determine what part of the interest is attributable to the acquisition portion of the loan and which part is attributable to the non-deductible equity portion.
Commentary
HERO (aka PACE) program loans are loans secured by the home via a property tax lien. The loans finance substantial energy-related improvements to the home and as such are acquisition debt, and thus the interest is acquisition debt interest.