Acquisition debt vs. Home Equity debt: What you should know?
For starters, it’s important to understand the concept of “acquisition debt” versus “home equity debt.”
Acquisition debt is a loan to buy, build, or improve a primary or second home and is secured by the home. That phrase “buy, build, or improve” is key.
Most original mortgages are acquisition debt, because you’re using the money to buy a house. But money used to build or renovate your home is also considered acquisition debt, since it will likely raise the value of your property.
On the other hand, Home equity debt is something different because most of the times the proceeds from a home equity debt are used for something other than buying, building, or substantially improving a home
For instance, if you borrowed against your home to pay for college, a wedding, vacation, or anything else, then that counts as home equity debt.
This distinction is important to get straight, particularly since you might have a home equity loan or line of credit that’s not considered “home equity debt,” at least in the eyes of the IRS.
However, if you’re using your home equity loan or HELOC to overhaul your kitchen or add a half-bath to your house, then it’s acquisition debt.
Keep in mind that in 2018, the home equity debt interest is no longer deductible. Meanwhile, acquisition debt used to buy, build, or improve a home remains deductible. Nevertheless, even if your sole goal is to buy, build, or improve a property, there are limits to how much the IRS will pitch in.
For more in detail info you may consult a tax adviser.