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Are Home Equity Loans Tax Deductible?
By Victor Rosario MONEY RESEARCH COLLECTIVE
One of the benefits of a home equity loan or home equity line of credit (HELOC) is that the cash you receive from it does not count as income or capital gains for tax law purposes. However, the mortgage interest related to home equity loans is only tax deductible under certain circumstances.
Homeowners should know the requirements outlined by the Internal Revenue Service (IRS) for making the interest from home equity loans tax deductible, including the rules regarding second homes, home improvements and renovations and itemized deductions.
Table of contents
- Can you deduct interest on a home equity loan?
- Rules for home equity tax deductions
- Claim a home equity loan interest deduction
- Are home equity loans tax deductible FAQs
- Summary of our guide to are home equity loans tax deductible
Can you deduct interest on a home equity loan?
Interest from a home equity loan or HELOC can be tax deductible, but only in specific circumstances. The entire loan amount that is being deducted must be used to buy, build or make substantial improvements to your home – meaning can’t deduct home mortgage interest on funds that were used for debt consolidation, paying off student loans, credit card debt or any other expense.
How much interest on a home equity loan is tax deductible?
There is a limit on how much interest can be deducted from your home equity loan, as stipulated under the Tax Cuts and Jobs Act of 2017. Married couples who are filing jointly can deduct interest from home equity loans of up to $750,000, while someone filing separately can deduct interest up to $375,000. This number includes your primary mortgage loan as well as your second mortgage.
Rules for home equity tax deductions
Aside from only being able to deduct interest on a combined loan balance of $750,000 or $375,000, the loan or loans must be financing a qualified residence – that is, your primary residence or second home. You must also decide whether to make an itemized list of your deductions, including for interest on a home equity loan, or take the standard deduction.
Standard deductions for 2022 amount to $25,900 for couples filing jointly and $12,950 for single filers. If itemizing your deductions comes to a sum less than your standard deduction, you’re better off avoiding the hassle and taking the standard deduction.
Claim a home equity loan interest deduction
Taxpayers looking for a tax return on their home equity loan interest that’s larger than the standard deduction will want to claim the amount on IRS tax form Schedule A, Itemized Deductions. This can be done through a tax professional or on your own. Either way, you’ll want to have some documentation handy to prove your expenses.
Requirements
- Mortgage interest statement (Form 1098) – This form shows the total amount of interest paid during the tax year and should be provided by your lender.
- Receipts to show how the lump sum was used – It is important to keep proof of how the funds were used for the improvement of the home on which the loan was taken on to benefit from the tax break.
- Other relevant personal finance documents – Make sure to have handy any documents that prove your current home value.
FAQs on tax deductions for home equity loans
Is HELOC interest tax deductible?
Yes, just like a home equity loan, the interest on a home equity line of credit is tax deductible when the loan is used for home improvement purposes.
Can I use my home equity loan on my main home to make home improvements on my secondary home?
You can take out a home equity loan on your first home to make improvements to a secondary home, but the interest will not be tax deductible. Interest is only tax deductible when used for home improvements on the same home that secures the loan.
When is home equity loan interest not tax deductible?
Although a home equity loan can be used for practically any big expense, it is only tax deductible when used to make improvements to the home.
Summary of our guide to are home equity loans tax deductible
Home equity loans have some of the lowest interest rates on the loan marketplace, and when using the loan for home improvement, the interest you pay can be tax deductible. While the average head of household will benefit from a standard deduction, some taxpayers who have bigger loans might prefer to itemize their deductions. That being said, all borrowers should be aware of the tax benefits at their disposal — especially given that these have been in effect since only 2017.
