Are Home Equity Loans Tax Deductible?
Homeowners cannot claim tax deductions on home equity loans in some cases. However, they can still benefit from cash-out refinancing programs to use the equity they’ve accrued in their homes.
The Tax Cuts and Jobs Act, signed by President Trump in December 2017, introduced this change. Interest paid on home equity loans is no longer tax-deductible, although there is one exception. The IRS clarified that deductions are allowed if homeowners use the loan to “buy, build or substantially improve” the property the equity is coming from.
This tax reform affects residents and homeowners across the country. Although you can’t deduct the interest paid anymore, home equity loans can still be a smart financial strategy. It’s one of the cheapest forms of borrowing, especially compared to credit cards and their higher interest rates.
Because of the Tax Cuts and Job Acts, we’ve seen an increase in the number of cash-out refinances as an alternative way of converting equity into cash.
A cash-out refinance is when a homeowner takes out a new loan for a higher amount than what is still owed on their current mortgage. The borrower can then receive the difference in cash.
Cash-out refinances are different than home equity loans because the loan balance is still tax-deductible if it’s the first mortgage on a primary residence.
Is 2020 a Good Year to Refinance?
The short answer is, yes. 2020 has provided record low rates with rising home values so far. The majority of homeowners will be in a good position to refinance this year. If they want to convert some equity into cash, they could consider a cash-out refinance.
According to Zillow, the average home value for California rose by 9% over the past year. With low rates, and rising home values, these trends create an optimal environment for homeowners to refinance.
If you would like to learn more about your refinancing options you can reach out to one of our expert Client Advisors. Our team is available 7 days a week by email at [email protected] or by phone at (855) 855-4491.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167