Is Home Equity Loan Interest Tax Deductible?
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Published July 18, 2024 | Updated July 19, 2024
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You can use a home equity loan for anything, from home renovations and debt consolidation to funding education. However, you may be able to save on your annual tax return when you use the funds for specific purposes.
If you’re wondering, “Is home equity loan interest tax deductible,” this guide will cover everything you need to know about whether you’re eligible to claim the tax deduction and the current rules you should know about.
Is Home Equity Loan Interest Tax Deductible?
Yes, home equity loan interest is tax-deductible. However, whether you can claim the tax deduction on the interest will depend on a number of factors, such as what you used the loan for, how much you borrowed, and when.
Rules for Deducting Home Equity Loan Interest
Before 2017, homeowners could use a home equity loan for any purpose and still deduct the interest paid on the loan. The Tax Cuts and Jobs Act of 2017 introduced some changes. Now, you must use the money to “buy, build, or substantially improve” your primary or secondary home (the equity that was used to secure the home equity loan) for the interest to be tax-deductible.
There are other rules you must meet to claim the mortgage interest deduction, such as what can be designated as a “qualified home” or property. For example, if it’s your second home, and you rent it out, you must have lived in the home for 10% of the days you rented it or more than 14 days, whichever is greater.
Keep in mind that you can only deduct the interest you paid on the loan, not the principal. For example, if your monthly payment for the home equity loan is $1,000 with $800 going to the principal, you can only deduct $200 for the interest charges. The money you invest in a property for its purchase, maintenance, or improvement will add to its cost basis for purposes of calculating taxable capital gains (or deductible capital losses), but none of these amounts are deductible against any current income or capital gains in any year other than the year in which the property is sold.
Limitations on Deducting Home Equity Loan Interest
Interest is deductible on home equity loan balances of up to $750,000 or $375,000 if you’re married and filing a separate return.
This is the new total loan amount limit for tax deductions on all residential debt. This means that if you have a mortgage loan and a home equity loan, the $750,000 limit will apply to the balance of both of them combined.
If you have an older loan from before 2018, you may be covered under the previous loan limit of $1 million or $500,000 if you’re married and filing a separate return.
How To Claim Home Equity Loan Interest Tax Deduction
If you’ve used a home equity loan for qualified home improvements, you may be eligible for a tax deduction. Here’s how to claim it.
Check If You’re Eligible
Review the Internal Revenue Service’s (IRS) rules on claiming the tax deduction to ensure you’re eligible. These are the requirements you must meet:
- You must use the loan to buy, build, or substantially improve your home.
- The loans should be for a main home (aka, primary residence) or a second home, neither of which is held as an investment property (for rent or short-term resale, aka “flipping”).
- The total of your mortgage debt and home equity loan must not be more than $750,000 or $375,000 if you’re married filing separately. For loans from before December 2017, this limit is $1 million or $500,000 if you’re married filing separately.
Gather Your Documents
To deduct your home equity loan interest on your tax returns, you’ll typically need to retain a copy of your loan contract(s), bank statements, proof of payments, and receipts for recordkeeping and reference when calculating the amount of home equity loan interest you paid during the year. You must also retain records and receipts showing how you used the loan funds so it’s easier to claim the deduction.
You’ll also need a Form 1098, which is a mortgage interest statement provided by your home equity lender. This form will show the amount of interest you paid during the tax year. When applicable, you may need to provide a statement for any additional interest payments that aren’t shown on Form 1098.
Gather all these documents and keep them handy so it will be easier to file income taxes on time.
Itemize Your Deductions
You’ll need to itemize your deductions to take advantage of this tax break. However, it’s only worth doing if your itemized deductions are more than your standard deduction for the tax year. You can only claim itemized deductions or claim the standard deduction, not both.
The standard deduction for the 2024 tax year is $14,600 for Single filers or Married Filing Separately (or $29,200 for couples who are Married Filing Jointly). Add all your itemized deductions to see if they’re more than these amounts, respectively, according to your tax filing status for the year. We recommend consulting a tax advisor to determine the right option.
Consult a Tax Professional To Claim a Home Equity Loan Interest Tax Deduction
So, are home equity loans tax deductible? Yes, the interest is tax-deductible, but only if you use the funds to buy, build, or substantially improve your home and meet the IRS’s other requirements. If you’re planning to borrow a home equity line of credit (HELOC) or a home equity loan, we recommend taking the time to understand the tax laws surrounding the IRS’ home mortgage interest deduction before you apply.
In some cases, it may be better to take the standard deduction, but it may be helpful to consult a tax professional to understand your situation fully. They can help you determine if you’re eligible for a home equity loan interest deduction and help you claim it.