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Home Equity loan interest still deductible... IRS confirms


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2018 Mar 13, 10:22pm   2,363 views  3 comments

by WildMind   ➕follow (0)   💰tip   ignore  

https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

As long as you use the money to improve your home it’s considered acquisition debt.

My question is how do they track that? For instance we have a $35k home equity loan. The first $10k we spent to pay down some outstanding bills... some of which were due to prior home improvements but they were not specifically earmarked on the check as such. We just wrote a check to ourselves and deposited the cash in our bank account.

My question is... as long as I have atleast $35k in home improvement receipts. Which we do... is that enough evidence should the IRS come a knocking?

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1   WookieMan   2018 Mar 14, 4:17am  

WildMind says
My question is... as long as I have atleast $35k in home improvement receipts. Which we do... is that enough evidence should the IRS come a knocking?


Don't take this as tax advice, but as long as you have the 1099-INT from the home equity lender, I probably wouldn't worry about it. I'm sure there's some sort of time line to allow use of the receipts to apply toward the loan interest, so that might be something to look into. But we're talking probably what, $1,500/yr in interest payments the first year, declining each year after. Even in a top tax bracket you're talking $500 difference owed to the Fed. Its likely more like $200-300 less paid to the Fed. This all assuming you'll even be itemizing anyway (I assume you do given the question).

The most likely scenario would be the IRS sending you a letter to prove that the home equity loan went towards home improvements. When I say likely scenario, I mean this is probably the only thing the IRS would do and it's probably a 5 in 100 chance. Send it the receipts and it likely goes away. It's really not worth the time for the IRS to be hunting down $200-300 here or there with a whole lot of effort.

$300 is $300, but at some point the time and effort to just have the receipts and potentially have to even reply may not be worth it. I'm not judging and everyone values money differently, but if I'm spending more then 3 hours dealing with tracking this shit, I'm probably just not reporting it to be honest. If you're itemizing, it's likely not worth your time in my opinion to even report it for the potential hassle unless you've already got everything organized if the IRS asks you to back it up. Outside of high property tax areas, you're usually solid six figures if you itemize, so you have to value your own time as well. But if you have the receipts at this point, I say go for it and don't worry too much.

Again, not tax advice. Talk to a TRUSTED CPA if you want to get to the bottom of it. I say trusted, because you'll likely find out that most will have to "get back" to you with the answer. AKA they don't know and will look it up.
2   Patrick   2018 Mar 14, 8:12am  

https://www.irs.gov/publications/p936

The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits.

Substantial improvement.
An improvement is substantial if it:

Adds to the value of your home,
Prolongs your home's useful life, or
Adapts your home to new uses.

Repairs that maintain your home in good condition, such as repainting your home, aren't substantial improvements. However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements.


So it does seem to be a bit nebulous, kind of a judgement call. @WildMind
3   Strategist   2018 Mar 14, 8:13am  

WildMind says
My question is how do they track that? For instance we have a $35k home equity loan.


Maybe the IRS expects everyone to tell the truth.

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