HELOCs and Tax Write-Offs: The Latest News

If you’re considering taking out a Home Equity Line of Credit (HELOC), now may be the time to do it. Interest rates are still low, but the Federal Reserve is predicted to raise rates at least twice more this year. And if you’re interested in taking out a HELOC for home improvements, you’re in luck. There have been several changes over the years regarding if and how homeowners can deduct interest on these loans.

Here’s a timeline of how it breaks down:

1913: The U.S. government creates income tax, allowing Americans to deduct interest from almost any loan, including credit cards, student debt, and car payments, citing that interest payments were “an expense of earning business and investment income.”

1986: The Tax Reform Act is passed, reducing the deductibility of loans to just the interest paid on mortgages. This was split into two types of debt: acquisition and home equity.

2017: Tax Cuts and Jobs Act is created, overhauling standard deductions and changing tax brackets.

2018: (February 21) IRS eliminates interest deductions for HELOCs, clarifying that deductions are allowed on home equity debts used to “buy, build or substantially improve” taxpayers’ homes.

While homeowners can deduct interest on HELOC loans used to add an addition, or make home improvements, that interest cannot be deducted if the loan is used to pay personal expenses, such as credit card debts.

Define “Substantial”

According to the NAHB, the new law does not include simple repairs that keep your home in regular working condition, such as painting interior walls, repairing gutters, fixing leaks and replacing broken windows. These improvements are considered necessary to maintain your home’s livability. However, if you plan to do extensive remodeling or restoration of your home, and painting or gutter repair is part of those plans, they would be considered a substantial improvement.

The definition is being challenged by some who say that even something as simple as painting a kitchen could be considered a ‘substantial improvement’ if it adds to a home’s value.

To wit: Zillow’s 2017 Paint Color Analysis found that painting certain rooms of a home a specific color does, in fact, increase a home’s sale price. For example, Zillow’s research found that homes with a blue kitchen sold for approximately $1,800 on average than expected, while homes with pale or soft periwinkle blue bathrooms sold for an impressive $5,440 more.

When it comes to your bathrooms, things like plumbing repairs might not be considered “substantial” according to the IRS. However, there are other bathroom improvements that would qualify, namely:

Complete Bathroom Remodels

According to the 2018 Cost vs Value Report, a mid-range remodel will return more than 52% of its cost, a substantial upgrade that most certainly adds value to your home. New flooring, updated showers and baths, lighting, storage and fixtures can freshen up an outdated space and make your home more attractive to potential buyers when it comes time to sell.

Aging and Accessibility Upgrades

More than 90% of Baby Boomers want to remain in their own homes as they age. This requires some home improvements that will make living at home safer and more comfortable for mature homeowners. In addition to widening hallways and doors and installing ramps as needed, a bathroom remodel that includes safety upgrades is considered a substantial improvement. Consider a bathroom remodel that includes a walk-in tub and/or a low-threshold shower base for ease of accessibility, as well as grab bars, shower seats and slip-resistant surfaces. Re-Bath’s ADA compliance standards and Certified Aging in Place Specialists (CAPS) make it easy to turn a risk-prone bathroom into a comfortable, safe space.

Homeowners may be able to deduct the interest on a HELOC for simple tub and shower upgrades, depending on their value and necessity. If its functionality you need, consider a walk-in tub, low-threshold shower, or safety bars to accommodate different needs.

If you’re considering a partial or full bathroom remodel, contact your local Re-Bath today for a no-cost consultation. Our experienced Design Consultants bring the showroom right to your front door and assist you in designing a bathroom that you’ll love for years to come.