HELOCs and Tax Write-Offs in a Post-Pandemic World

If you’re considering taking out a Home Equity Line of Credit (HELOC)for remodeling, now may be the time to do it. The economy is steadily recovering after the COVID-19 pandemic, and interest rates have hit as low as 3% in some cases. It’s also the perfect time of year to cross some renovation to-dos off your list. Winter is coming; get to those upgrades you’ve been putting off soyour inner sanctum can be as cozy as possible during these colder months.
A HELOC is a great way for homeowners to get the capital they need for large home improvements. 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 downand what it means for your renovation plans:
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: TheTax Reform Actis passed, reducingthedeductibilityof loansto 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: IRS eliminatesinterest deductions for HELOCs, clarifying that deductions are allowed on home equity debts used to “buy, build,or substantially improve” taxpayers’ homes.
2020:HELOCs are greatly affected by COVID-19. As interest ratesplunge, banks become bombarded with new applications, causing them to tighten eligibility requirements or suspend HELOC applications altogether.
2021: Interest rates are low, with some HELOC rates starting below 3%. The economy is recovering from the worst effects of the COVID-19 recession, and home equity lending is picking back up. Now could be a great time to take advantage of low interest rates and apply for a HELOC.

Define “Substantial”

Interest on HELOC loans cannot be deducted for simple home repairs or personal expenses, such as credit card debts.Instead, homeowners can deduct interest for substantial home improvements, like building an addition to the home, installing a new roof, or replacing the HVAC system.

What are some examples of non-substantial home improvements? According to the National Association of Home Builders (NAHB), painting interior walls, repairing gutters, fixing leaks,and replacing broken windowswould all be considered non-substantial home improvements. 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.
In July of 2021, Zillow released a study finding that paint color does, in fact, affect a home’s resale price. Homes with light blue bathrooms sold for $5,000 more on average, while bright red kitchens decreased the sale price by an average of $1,500. Perhaps a fresh coat of paint is more substantial than banks realize!
Another type of improvement that could greatly affect your home’s value are bathroom renovations. While plumbing repairs might not be considered “substantial” according to the IRS, there are other bathroom remodels that qualify. Here are a few examples:

Complete Bathroom Remodels

According to the 2021 Cost vs Value Report, a mid-range bathroom remodel will return more than 60% 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 remodeling 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.