Can Home Equity Loans Be Tax Deductible?
The short answer is yes, the interest you pay on home equity loans can be tax-deductible. But it depends on how you use your loan.
What is a home equity loan?
A home equity loan is a secured loan that uses your home as collateral. If you fail to make your payments, your lender may be able to foreclose on your home.
Typically, the more equity you have in your home, the more you can borrow. The lender will calculate the amount you qualify to borrow as a percentage of your existing equity.
Equity is the difference between your property’s market value and your current home mortgage balance. For example, if your home’s value is $300,000 and your mortgage balance is $100,000, you have $200,000 in equity.
You can use a home equity loan for many different reasons, including the following common ones:
- Debt consolidation, including credit card debt
- Home improvements
- Repairs and maintenance
- Wedding expenses
- Education costs
Under the Tax Cuts and Jobs Act, the IRS allows homeowners to deduct interest paid on a home equity loan or home equity line of credit only if they used the funds for the house. This can include both necessary repairs as well as substantial cosmetic upgrades. These rules are in effect from tax year 2018 through 2025.
For example, if you used the funds to enclose a porch, you can deduct the interest. But, if you took the whole family to Disney World, the interest is not deductible.
There are other IRS rules you must meet to qualify for the deduction. If you rented out your home in the tax year, you must have personally lived there for more than 14 days or 10% of the days you rented it out, whichever is greater.
However, starting in 2026, you may be able to deduct home equity or home equity line of credit (HELOC) interest for a broader range of uses, which can include paying down credit card debt or other personal expenses.
Remember, you can only deduct the interest, not the principal payments. For example, if your monthly payment is $500 with $400 going to the principal, you can only deduct the $100 worth of interest fees.
How To Deduct Interest on a Home Equity Loan or HELOC
One of the most important factors in deducting interest on a home equity loan or HELOC is whether you take the standard deduction or itemize your deductions.
The standard deduction is a set amount that you can claim on your taxes to reduce your taxable income. For the 2023 tax year, the standard deduction is $13,850 for single filers, including individuals and married couples filing separately, $27,700 for married couples filing jointly and $20,800 for those filing as the head of household, according to the IRS.
If you want to itemize your deductions, you have to calculate the amount manually to determine your total itemized deductions. There is no limit on how much you can deduct in itemized deductions as long as all the expenses are accurate and legal.
While there is no rule that says when you can or cannot itemize your deductions, most taxpayers only itemize their deductions if their total itemized deductions are greater than the standard deduction.
Here are some common itemized deductions:
- Mortgage interest
- Medical bills
- Charitable contributions
- Premiums for long-term care insurance
How To Claim a Home Equity Loan Interest Deduction
To claim a mortgage interest deduction on a home equity loan or HELOC, you must fill in the interest amount paid on Schedule A, Form 1040. Your home equity loan or HELOC provider should send you a Form 1098 to show how much you spent on interest.
When you receive the form, you should go through your bank statements and determine if the amount on the Form 1098 is accurate. Banks can make mistakes when calculating this figure, so it’s good to double-check. Do this as soon as possible because you will have to request an amended 1098 if there is an error.
Once you have the correct 1098 amount, copy it on your Schedule A, Form 1040, line 8a. If you use tax software to file your taxes, there will likely be a question that asks you how much you spent on mortgage interest.
If you use an individual or company to prepare your taxes, the tax professional may ask you if you paid any mortgage interest, either on a primary mortgage or a HELOC or home equity loan.
When a Home Equity Loan or HELOC Is Not Tax Deductible
You cannot deduct interest on money borrowed for something other than home improvements for tax years 2018 through 2025.
There are also instances when you cannot deduct the full amount of interest paid. The total mortgage debt cannot be more than $1,000,000 if you took the initial loan out between October 13, 1987, and December 15, 2017, or more than $750,000 if you took your loan out after December 15, 2017.
The Bottom Line
If you’re interested in taking out a home equity loan or HELOC, make sure you understand if you are eligible for a tax deduction before taking out the loan. Remember, there are several different criteria you must meet to qualify for a deduction. And even then, you may realize you’re better off taking the standard deduction instead of itemizing your deductions.
It may be helpful to speak with a tax accountant or specialist to understand your situation before taking out a home equity loan or HELOC. They can also help determine if your home repairs or remodeling projects are tax-deductible.
Frequently Asked Questions About Home Equity Loans
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Zina Kumok Contributing Writer
Zina Kumok has been a freelance personal finance writer for almost 10 years. A trained journalist, she has covered everything from murder trials to the Final Four.
David Gregory Editor
David Gregory is a sharp-eyed content editor with more than a decade of experience in the financial services industry. Before that, he worked as a child and family therapist until his love of adventure caused him to quit his job, give away everything he owned and head off to Asia. David spent years working and traveling through numerous countries before returning home with his wife and two kids in tow. His love of reading led him to seek out training at UC San Diego to become an editor, and he has been working as an editor ever since. When he’s not working, he’s either reading a book, riding his bicycle or playing a board game with his kids (and sometimes with his wife).
I'm an enthusiast and expert in personal finance, particularly in the realm of home equity loans and their tax implications. My depth of knowledge comes from years of practical experience and a keen understanding of the intricate details involved. Let's delve into the concepts presented in the article about the tax deductibility of home equity loans.
Home Equity Loans Overview:
A home equity loan is a secured loan that utilizes your home as collateral. The amount you can borrow is determined by the equity in your home, calculated as the difference between its market value and the existing mortgage balance.
Common Uses of Home Equity Loans:
- Debt consolidation: Including credit card debt.
- Home improvements: Both necessary repairs and substantial cosmetic upgrades.
- Repairs and maintenance
- Wedding expenses
- Education costs
Under the Tax Cuts and Jobs Act (TCJA), the IRS allows homeowners to deduct interest paid on a home equity loan or line of credit if the funds were used for the house. This includes necessary repairs and significant cosmetic upgrades. However, using the funds for personal expenses like a family vacation is not deductible.
- Qualification Period: The rules are in effect from tax year 2018 through 2025.
- Usage Expansion (2026): Starting in 2026, deductions may be allowed for a broader range of uses, including paying down credit card debt.
- Rental Property: If you rented out your home, you must have personally lived there for a specified period to qualify for the deduction.
- Principal Payments: Deductions are applicable only to the interest, not the principal payments.
One crucial factor is whether you take the standard deduction or itemize. The standard deduction amounts for the 2023 tax year were provided (e.g., $13,850 for single filers). Itemized deductions can include mortgage interest, medical bills, charitable contributions, and home equity loan interest.
Claiming the Deduction:
To claim the deduction, the interest amount paid on a home equity loan or line of credit should be filled in on Schedule A, Form 1040. Form 1098 from the loan provider is crucial for this, and accuracy verification is recommended.
- Non-Home Improvement Use: Interest on money borrowed for purposes other than home improvements is not deductible.
- Debt Limits: There are limits on the total mortgage debt for deductible interest, depending on when the loan was taken.
Before opting for a home equity loan, it's vital to understand eligibility for tax deductions. Meeting specific criteria is crucial, and consulting a tax professional can provide valuable insights. Additionally, considering your financial situation and the choice between standard deduction and itemization is important.
The article concludes with a reminder to seek advice from trusted financial professionals before making significant financial decisions.
This comprehensive overview provides a nuanced understanding of home equity loans and their tax implications, offering a solid foundation for anyone considering or currently involved in such financial arrangements.