Is Home Equity Loan Interest Tax Deductible in Washington State?

Home equity loan interest may be tax deductible for Washington homeowners, but it depends mainly on two things: whether the loan is secured by the home and how the funds are used.

In general, interest may still qualify for a deduction when the loan proceeds are used to buy, build, or substantially improve the home that secures the loan. If the money is used for personal expenses instead, the interest usually is not deductible.

For Washington homeowners, that means the answer is not simply yes or no. It comes down to whether your home equity loan meets the applicable federal rules and whether your use of the funds qualifies under those rules.

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Home Equity Loan Interest Still Deductible in Some Cases

The Internal Revenue Service said in a news release that “in many cases they can continue to deduct interest paid on home equity loans.”

Here’s the caveat: If you’re using the money to build or improve the property that’s being used as collateral for the loan, then the interest is probably tax-deductible.

According to IRS guidance, interest from a loan secured by your home is not deductible to the extent the loan proceeds weren’t used to buy, build, or substantially improve the home that secures the loan. For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.
So whether or not you’re able to deduct the interest paid on a home equity loan in Washington will largely depend on how you’re using the money.

• If you use the funds from an equity loan to pay for things like a kitchen renovation, a new roof, or an addition to your house, you should still be able to deduct the interest paid on the loan.
• But if you use the money received to take a vacation, pay off a student loan, or pay off credit card debt, the tax deduction won’t apply.

Many homeowners in Washington who take out home equity loans put the money right back into their homes, in the form of renovations, additions, and the like. The good news for these folks is that the tax deduction should still be allowed in most cases. Still, you might want to consult a CPA when filing, if you’d like to maximize your deductions.

There’s a Dollar Limit

The IRS update also pointed out that, under the law, there’s a dollar limit on mortgage loans that qualify for interest deduction. Taxpayers can deduct home mortgage interest on the first $750,000 of indebtedness. This cap applies to the combined total of loans used to buy, build or improve the homeowner’s main residence and (in some cases) a second home.

The IRS advisory offered some examples to clarify this. Here’s one of those examples:

A taxpayer takes out a $500,000 mortgage loan to buy a primary home with a market value of $800,000. The following month, that same person takes out a $250,000 equity loan to put an addition on the main home. Both of the loans are secured by the main home, and the total does not exceed the cost of that property.

Because the total amount of both loans does not exceed $750,000, the combined qualified debt falls within the deduction cap. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.

Like most tax issues, this is a somewhat confusing subject. Hopefully you’ll find it a little less confusing after reading this article.

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