In its policy statement, the IRS offered examples of what you cannot do with your HELOC or home equity loan cash if you want to write off the interest. At the top: paying off credit card bills and other personal debts. This is potentially a big deal for some owners because, in past years, debt consolidation, rolling credit card balances and other high interest rate personal expenses together into a single, lower-cost loan, was an important financial strategy for many families. You can still do debt consolidations with equity loans — you just can’t write off the interest. Another major use that is now cut off from interest deductions when using home equity dollars: paying off student loans.
Tzhe IRS didn’t specify them, other uses for equity cash that no longer qualify for write-offs are auto purchases, vacation travel expenses and home furnishings.
You don’t have to spend 100 percent of your HELOC cash on home improvements, according to Greg A. Rosica, a tax partner with Ernst & Young, the national accounting firm. You can buy or do other things with the money — you just can’t deduct the interest you pay on them. Say you own a $500,000 house with a $300,000 first mortgage. You borrow $100,000 via a HELOC this year. You spend $80,000 on a new roof and master bath. You spend the other $20,000 on paying off student loans. Under IRS allocation rules, you can write off interest on the $80,000 you spend on home improvements, four-fifths of the total. Interest payments on the student loans are not deductible.
There’s plenty of cushion that could be tapped for responsible purposes, whether homeowners choose to deduct the interest or not.