Is Home Equity Loan Interest Tax Deductible?

Table of Content

• Forms You'll Need To Claim A HELOC Deduction
• Rules for Deducting Home Equity Loan Interest
• How To Take a Home Office Tax Deduction
• Rules For Deducting Interest On A Home Equity Loan Or A Home Equity Line of Credit (HELOC)
• You Can Only Deduct A Certain Amount
• Mortgage Interest & Mortgage Debt
• Specific Tax Rules

The $1 million cap applies for mortgages obtained before that date. Unless you itemize deductions, the interest you pay on a HELOC is not going to help you. Fewer people have itemized since tax reform due to an increased standard deduction. For 2022, the standard deduction is $25,900 for married couples filing jointly and $12,950 for single individuals. As a result of the higher standard deduction, itemizing may not be beneficial to you. In that case, the interest you pay, even for property renovation, on a HELOC will not be deductible.

So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Previously, you had been allowed to deduct the interest you paid on up to $100,000 in loans and lines of credit, regardless of how you used the money. That has changed and is true for both loans that preceded the new legislation and those that come after. To deduct your home equity loan interest, you’ll need the 1098 forms from your mortgage lender and itemized receipts to prove how you used the funds. For those of you who are tempted by the record low mortgage rates and plan to use your home like a piggy bank to fund your fabulous lifestyle, you will not be able to deduct the interest on your HELOC.

Forms You'll Need To Claim A HELOC Deduction

Cash back, points and miles are considered discounts on purchases, not earned income. If you have a rewards credit card, feel free to maximize your reward opportunities without having to worry about paying taxes on your rewards earnings — including welcome bonuses. Her expertise includes mortgages, credit card rewards, and personal finance. That generally means your total itemized deductions must be greater than the standard deduction available for your filing status. A home equity line of credit can help cover large expenses or consolidate other high-interest-rate debts. Because a HELOC uses your home as collateral, these loans often offer lower rates than other types of loans, and in some cases, the interest is tax-deductible.

Specifically, these loans must be used to “buy, build or substantially improve the taxpayer’s home that secures the loan” for the interest to be deductible. Prior to the TCJA, there were no restrictions on how homeowners could use funds. The current tax laws allow you to deduct state and local taxes of up to $10,000 for single taxpayers and married couples that file jointly. The deduction limit drops to $5,000 for married couples that file separate returns.

Rules for Deducting Home Equity Loan Interest

A home equity loan lets you borrow against the value of your home, using the equity you’ve accumulated as collateral. You can also treat amounts you paid during the year for qualified mortgage insurance as qualified home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. However, the funds from the loan must be used to “buy, build or substantially improve” the home that was used to secure the loan.

For 2019, your itemized deductions must exceed $12,200 if you’re filing as a single taxpayer or $24,400 if you’re married and filing jointly. The first thing to understand is that the deduction is only available if you use the loan proceeds for “qualified expenses.” These include things like making improvements to the property or paying for repairs. Interest on debt used for other purposes, such as financing a property purchase or covering operating expenses, is not deductible. Since the 2018 tax reform law, the tax deductions limits have changed on all mortgage and home equity debt. You can only deduct interest charges on a maximum of $750,000 in residential loan debt including HELOCs if the line of credit was approved before Dec. 15, 2017. If your HELOC was approved before that date, you may fall under the old limit of $1 million.

How To Take a Home Office Tax Deduction

However, it’s always wise to speak to a tax professional to explore your options before proceeding. A home equity loan is one way to access the equity in your home for a variety of different purposes. In addition to using the money for home improvement projects, many borrowers use home equity loans to finance debt consolidation or other large purchases like investments or higher education. While the interest paid on home equity loans can be tax-deductible, there are some limitations. This is an extremely popular way that people take HELOCs in the first place.

Prior to the passage of the TCJA, you could deduct home equity loan interest even if it was used for other financial reasons, such as debt consolidation or to buy another asset. However, the new law limits home equity loan interest deductions to home-improvement-related expenses. Those limits also include any mortgage loans currently outstanding. For example, if you still have a mortgage balance of $500,000, only $250,000 of home equity loans will be eligible for tax deductions. If you find that your head is spinning with all this talk of taxes, you're not alone. The main takeaway is to be proactive, so you don't get whacked with a sky-high tax bill when filing in 2020.

Under IRS rules, you can only deduct the interest from mortgages up to $750,000 . This is a combined limit for your mortgage and your HELOC together. The IRS grants an exclusion on real-estate capital gains up to $500,000 for married couples filing jointly, and $250,000 for singles . However, you must have lived in the home for at least two of the last five years prior to its sale. For example, if you bought a home a few years back for $300,000 and sold it today for $900,000, youd make a $600,000 profit.

Home mortgage interest is any interest you pay on a loan secured by your home, and can include your primary home or a second home. Let’s say you paid $2,000 in interest on a HELOC and $10,000 in interest on your mortgage in 2021. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate.

Since the collateral is your home, interest rates are lower than other consumer loans or credit cards. If youre interested in consolidating credit card debt, for example, and if you can get a much lower rate with a HELOC, then you could save money this way. Of course, this strategy assumes that youll pay the HELOC down as quickly as possible to minimize interest charges and that you wont run up new debt on the cards that youve paid off.

For example, say you initially borrowed $300,000 to purchase a home, then over the course of time paid it down to $200,000. Then you decide to refinance your loan for $250,000 and take that extra $50,000 to help your kid pay for grad school. That $50,000 you took out to pay tuition is home equity debt—and that means the interest on it is not tax-deductible.

You Can Only Deduct A Certain Amount

Likewise, if you need to borrow money for another reason, such as refinancing home renovations, a HELOC may be much less expensive than other borrowing options, such as a personal loan or credit card. Basic maintenance, such as painting or minor repairs, isn’t considered a "substantial" improvement. So you can’t deduct interest on a HELOC used for these expenses unless they’re part of a larger remodeling project. Before the Tax Cuts and Jobs Act of 2017, homeowners had a lot more flexibility when deducting interest from a home equity loan.

In addition to limiting the deduction to certain expenses, the interest deduction is only available for a total loan amount of $750,000. This means that if you are claiming the mortgage interest deduction for both your primary mortgage and your home equity loan or HELOC, you can only claim interest on up to $750,000 of combined loan balances. So, you could use a home equity loan to refinance credit card debt or pay for a wedding, and it was all deductible as long as you stayed under the $100,000 home equity debt cap. The interest on a HELOC is tax-deductible if the loan is used to buy, build, or improve your primary residence or second home. Suppose you use a home equity loan to buy or improve a rental property.

Generally, homeowners may deduct interest paid on HELOC debt up to $100,000. This may trip up some of you who've owned your home for decades or perhaps bought a real fixer-upper. For example, let's say you purchased a home for $75,000 and plan to put a ton of work into improvements. In this case, you would only be able to deduct interest paid up to $75,000, if using a HELOC. If you itemize, you might be able to fully deduct interest payments on either type of loan. This distinguishes these loans from other forms of consumer credit.

If you are getting a home equity loan or second mortgage to make improvements to your home, then it is acceptable to deduct those interest payments. However, if you are using them to fund vacations, purchase cars, pay for your kids to go to college, or even to pay off medical bills or credit cards, then you receive no deductions for mortgage interest paid. In the past, many homeowners have taken advantage of the tax deductibility of home equity loan or line of credit interest by using the proceeds from those loans for a variety of purposes. Before the new tax law, how you used the loan proceeds did not matter.