5 min read May 16, 2024

Are Home Equity Loans Tax Deductible?

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Carol Coutinho

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Home equity loans can be an excellent way to borrow money for a home remodel, debt consolidation, or other expenses. However, many homeowners wonder whether the interest on their home equity loan or home equity line of credit (HELOC) is tax-deductible.

In this blog post, we’ll discuss everything you need to know about home equity loan tax deductions.

Are Home Equity Loans Tax Deductible?

The answer to this question depends on several factors. In general, the interest on a home equity loan is tax-deductible. If the loan was used to improve, buy, or build your home.

If you used the loan for other purposes, such as a vacation or a car purchase. The interest is not deductible. It’s important to note that the Tax Cuts and Jobs Act of 2017 changed some of the rules around home equity loan tax deductions.

Before 2018, you could deduct the interest on a home equity loan regardless of what you used the money for. However, after 2018, the interest is only deductible if it was used to buy, build, or improve your home.

Is Interest on a HELOC Tax Deductible?

The rules for HELOC interest deductions are similar to those for home equity loans. If you used the HELOC to improve, buy, or build your home, the interest is tax-deductible.

If you used the HELOC for other purposes, such as a vacation or a car purchase. The interest is not deductible. It’s important to note that the Tax Cuts and Jobs Act of 2017 also changed some of the rules around HELOC interest deductions.

Before 2018, you could deduct the interest on a HELOC regardless of what you used the money for. However, after 2018, the interest is only deductible if it was used to buy, build, or improve your home.

HELOC Tax Deduction

If you used your HELOC to improve, buy, or build your home, you can deduct the interest on your loan. However, there are some limitations. You can only deduct interest on loans up to $750,000 (or $375,000 if you’re married filing separately).

If you have a larger loan, the interest on the excess amount is not deductible. When claiming a deduction for a home equity loan or line of credit interest, taxpayers must meet several conditions set forth by the IRS.

If the loan is used for other purposes, such as paying off credit card debt. The taxpayer can only deduct interest on the portion of the loan that was used for home improvements.

Here are some of the most important rules to keep in mind when determining whether you can claim a home equity loan tax deduction:

The loan has to be secured by your home

You must secure the loan with your home to claim a tax deduction on a home equity loan, meaning you used your home as collateral to obtain the loan.

The loan must be used to buy, build or improve your home

To qualify for a home equity loan tax deduction, the loan must have been used to buy, build or improve your home.

This means that if you used the loan for any other purpose, such as to pay off credit card debt or to finance a vacation, you cannot claim a deduction for the interest paid on the loan.

The loan must not exceed certain limits

The size of the loan may limit the amount of interest that can be deducted from a home equity loan or line of credit. Before 2018, the interest deduction limit for home equity debt was $100,000 for single filers and $50,000 for married filing separately.

However, starting in 2018, the Tax Cuts and Jobs Act (TCJA) limits the interest deduction to interest paid on up to $750,000 of mortgage debt on a first and second home combined.

This limit applies to new loans and refinanced loans are taken out after December 15, 2017.

You must itemize your deductions

To claim a home equity loan tax deduction, you must itemize your deductions on your tax return. This means that you must report your deductible expenses on Schedule A of Form 1040.

If you take the standard deduction, you cannot claim a deduction for the interest paid on your home equity loan or line of credit.

You must use the loan for your own benefit

Finally, to claim a home equity loan tax deduction, you must use the loan for your own benefit.

This means that you cannot claim a deduction for the interest paid on a loan. Which you used to help a friend or family member. Even if they used the funds to improve their own home.

Conclusion

In summary, the interest on home equity loans is tax deductible. Taxpayers must meet specific requirements to claim the deduction.

The loan must be secured by the taxpayer’s home. Used to buy, build or improve the home, and not exceed certain limits. And the taxpayer must itemize deductions on their tax return.

If you are unsure whether you qualify for a home equity loan tax deduction, it is best to consult with a tax professional.

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Frequently Asked Questions

What is the downside of a home equity loan?

The downside of a home equity loan is that it uses your home as collateral, which means that if you fail to repay the loan, you could risk losing your home.

How much of a HELOC is tax deductible?

The amount of a HELOC that is tax deductible depends on several factors, including the loan amount, the interest rate, and the use of the funds. Taxpayers can generally deduct interest on up to $100,000 of home equity debt, but there are certain conditions that must be met.

Does a home equity loan raise your taxes?

No, a home equity loan does not raise your taxes.

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