Yes, the interest paid on a home equity loan or HELOC is deductible if you used the loan to buy, build or improve the home used to get the loan.
When you own real estate, home equity loans and home equity lines of credit (HELOCs) are effective tools to turn the equity you’ve built in the property into liquid cash. In the past, the interest you pay on these loans was even tax-deductible up to a certain limit.
But in 2017, the IRS changed the rules about writing off home equity loans. Now, fewer people and different loan types will qualify to deduct the interest on a home equity loan on their income taxes.
Congress passed the Tax Cuts and Jobs Act (TCJA) on December 16, 2017, changing the rules for deducting interest on a home equity loan.
If you borrowed a home equity loan before the TCJA was passed, you can deduct:
These rules apply to both first and second mortgage loans on a primary or second home. Home equity loans opened after the TCJA, however, have different limits.
If you took out a home equity loan after the TCJA passed (December 16, 2017), you can deduct:
The tax deductibility of interest on a home equity loan or HELOC depends on how you spend the loan funds. Interest on home equity loans and HELOCs is only deductible if you use the funds to “buy, build, or substantially improve” the home to which the loan is attached.
This applies to interest on both new loans and those loans that existed before the TCJA was passed.
The interest on a home equity loan isn't tax deductible if you used to funds for:
Suppose you and your spouse borrowed $400,000 to buy a home in 2019. In 2020, you took out a home equity loan of $100,000 to renovate the kitchen and also to buy new furniture. You'd only be able to deduct interest on the portion of the loan you used towards the renovation, and not the furniture costs because that doesn't fall under "buy, build, or improve the home."
All of that said, the TCJA also increased the standard deduction substantially, making it pointless for most homeowners to itemize their home equity and HELOC tax deductions. In 2023, the standard deduction is $13,850 for single filers and $25,900 for couples who are married and filing jointly. Unless you’ve taken out a very large home equity loan or HELOC, you’re unlikely to have spent more than $25,900 (or $13,850) in interest in a fiscal year.
If you still want to claim a home equity loan, you must itemize deductions using IRS Form 1040. Again, you should only do so if your deductible expenses, including mortgage interest payments and eligible home equity loan interest payments, add up to more than the standard deduction of $13,850 or $25,900.
Here’s how to claim the deduction properly.
The checklist to ensure your home equity loan or HELOC qualifies for interest deduction includes:
Related: Learn about the. mortgage
The IRS wants proof of everything. So, if you want to claim an interest deduction, you need your mortgage statements to verify how much you borrowed. You’ll also need receipts, contracts, and any other documentation you can find to prove that you used the funds to buy, build, or improve upon the house you used as collateral for the loan.
Before tax time, you should also receive an IRS Form 1098 from your lender. This Mortgage Interest Statement will tell you exactly how much interest you paid on your mortgage, home equity loan, or HELOC during the tax year. If you didn’t get it, call your lender.
This is where things get tricky. The United States tax code is so complicated, most people just take the standard deduction. To determine your income tax deductions, you must add up all admissible payments throughout the year that you have documentation for. You can include property taxes and mortgage points on your primary residence, too.
If you have a new mortgage and you bought mortgage points to lower your interest rate or as an underwriting fee to your lender, you might be able to itemize them in your total deductions. Mortgage points count as prepaid mortgage interest, allowing you to deduct them if the loan was for your primary residence and it’s normal business practice in your area to pay mortgage points.
Factoring in mortgage points might help you get closer to surpassing the standard deduction but it gets tricky. Consult with your mortgage originator and/or tax advisor to help you figure out your specific situation.
Finally, when you have an idea of your total tax-deductible amount, you must elect to file with a standard or itemized deduction. It’s a lot of legwork to get to this point and most homeowners will not have paid enough interest on a home equity loan or HELOC to justify the work in the first place.
When you get your 1098 from your mortgage lender, that’s a good jumping off point to figure out if it makes sense to do the hard work of itemizing. Remember, the standard deduction for 2023 is $13,850 for single filers and $25,900 for couples who are married and filing jointly. If your 1098 states you spent $22,000 in interest (an enormous amount), then maybe it makes sense to itemize. If you’re only around $5,000 in interest, it’s probably not worth the effort because you might save more with the standard deduction anyway.
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