HELOCs and Acquisition Debt

Posted by Lee Reams Sr. on

There was a recent lengthy discussion on ClientWhys connect in regards to what constitutes acquisition debt and equity debt in light on the TCJA.

Over and over individuals were assuming a HELOC was by definition equity debt. That is simply NOT true!  A HELOC can be acquisition debt or equity debt. IRC Sec 163(h)(3) does not even refer to the term HELOC.

Section 163(h)(3)(B) provides this rule...

(B) Acquisition indebtedness

(i) In general the term “acquisition indebtedness” means any indebtedness which - 

(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and

(II) is secured by such residence. Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

So a HELOC or any form of loan, as long as it is secured by the home and the proceeds are used to substantially improve a home (such as for a pool, room addition, solar system, etc.), is acquisition debt to the extent it does not exceed the acquisition debt limit.  Where a loan is used partially for substantial home improvements and partially for another use, then it is partially acquisition debt and partially equity debt subject to the caps for acquisition and equity debt.  This has always been a problem in the past keeping track of what was acquisition debt and equity debt. TCJA has simplified that problem since beginning in 2018 EQUITY DEBT INTEREST IS NO LONGER DEDUCTIBLE.  This is true no matter when the loan was incurred. 

Beginning in 2018 we have new rules for acquisition debt as well. Acquisition debt acquired before December 15, 2017 is still limited to $1million. However, remember when the debt is paid down the cap is also being reduced. 

Acquisition debt incurred on Dec 15, 2017 and after is limited to an initial amount of $750,000.

These limits apply to both the primary residence and second home of the taxpayer. The limits apply to combined debt of both, not separately.

 

 

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