The 2017 Tax Reform Bill: FAQ on the Deductibility of Home Equity Interest
Monday, January 8, 2018 7:00 AM

CUNA Compliance has received several questions as of late regarding how the recently enacted tax reform legislation (H.R. 1) will affect the deductibility of interest for home equity loans and lines of credit going forward. Let's take a closer look, keeping in mind that we are not tax law experts. Members should be advised to consult their tax advisor for further information regarding the deductibility of interest and other charges. 

Under the new tax law, is interest on home equity lines of credit (HELOCs) deductible or was that deduction removed?

Section 11043 of the tax bill amends Section 163(h)(3) of the Internal Revenue Code which is found in Title 26 of the United States Code. 

It provides that a deduction for interest paid on home equity indebtedness shall not be allowed for taxable years 2018 through 2025. There is no grandfather provision for this disallowance, meaning that the deduction has been temporarily eliminated for ALL home equity indebtedness regardless of when the debt was incurred. 

NOTE: Section 11043 also reduces the current $1,000,000 cap on the deductibility of interest for acquisition indebtedness to $750,000. However, acquisition indebtedness incurred before December 15, 2017 is grandfathered at the $1,000,000 limit. 

What debt qualifies as "home equity indebtedness" for purposes of this discussion?

Section 163(h)(3)(C) defines home equity indebtedness as any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed:

  • The fair market value of such qualified residence, reduced by
  • The amount of acquisition indebtedness with respect to such residence.

Use of the word "any" would seem to indicate that either a closed-end home equity loan or home equity line of credit meets the definition of home equity indebtedness. 

NOTE: The Internal Revenue Code defines "acquisition indebtedness" as any indebtedness which is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, so long as it is secured by such residence. 

Does any of this affect our advertising responsibilities when it comes to home equity loans and lines of credit?

Not really. Credit unions are strongly encouraged to not place themselves in the position of giving tax advice to their members. In addition, the advertising requirements found in Sections 1026.16 (for open-end credit) and 1026.24 (for closed-end credit) of Regulation Z remain. These sections provide that in advertisements for loans secured by the member's principal dwelling, the credit union must clearly and conspicuously state that the member should consult a tax advisor for further information regarding the deductibility of interest and charges.

Source:  CUNA Compliance Blog