Key Takeaways
● Home equity loan and home equity line of credit (HELOC) interest is tax deductible only if the funds are used to buy, build or substantially improve the home (primary or secondary) that secures the loan.
● Home improvements like adding solar panels, replacing the roof or adding a room, are tax deductible, but repainting, updating the wallpaper or making other cosmetic changes are typically not.
● Taxpayers must itemize deductions to claim the home equity loan interest deduction, which is beneficial only if the total of the itemized deductions exceeds the standard deduction.
● The Tax Cuts and Jobs Act of 2017 (TCJA) limits the deduction to interest on up to $750,000 of qualified loans for joint filers ($375,000 for single or separate filers). Interest remains deductible on second homes.
● The TCJA is set to expire after 2025, when the limitations on deductions on interest may recede, allowing borrowers to deduct their interest no matter what the loan is used for.
Are Home Equity Loans And HELOCs Tax Deductible?
If you used a home equity line of credit (HELOC) instead of a home equity loan, you might wonder if you qualify for an interest deduction. While these two types of home equity financing operate differently, they have the same tax rules. If you paid HELOC interest, you could qualify for the deduction if you used the funds to buy, build or improve your home.
But keep in mind that you’ll need to prove to the IRS how those funds were spent. That means you must keep careful records to claim the home equity loan tax deduction. According to the Internal Revenue Service (IRS), mortgage interest on a home equity loan is tax deductible as long as the borrower uses the money to buy, build or improve a home.
For instance, single homeowners or those who are married and filing separately can take the interest deduction on up to $375,000 in equity loans taken out after December 2017. Married couples filing jointly can claim up to $750,000. For loans taken out before December 2017, single filers can claim up to $500,000, and married couples filing jointly can claim up to $1 million.
However, home equity funds used for any purposes other than for your home aren’t tax deductible. The good news is you can take the deduction on a first or second home, just not an investment home. This has other tax deductions you can take advantage of to lower your tax liabilities.
Interest On Home Equity Loans
A home equity loan comes with a fixed interest rate for the lifetime of the loan. If you use this loan to “buy, build or substantially improve” your home, according to the IRS, you may be able to deduct the interest paid on the loan.
If you use the home equity loan to pay down debts or make cosmetic changes to or remodel your primary home (or second home), you cannot take the mortgage interest deduction for tax years 2018 to 2025.
This will change after 2025, when the interest on HELOCs and home equity loans may be deductible, no matter what you spend the loan on, assuming you take the itemized deduction route versus standard deductions, at tax time.
Interest On Home Equity Lines Of Credit
A HELOC is another way to take out equity for home improvements, this time in the form of a line of credit. The interest you will pay on a HELOC (an open line of credit from your lender) is often lower than that of a home equity loan due to the nature of the loan product.
When you take out a HELOC, you are responsible for paying only the interest on the amount you borrow from the credit line. Due to a HELOC’s variable Interest rate, the amount of interest owed may rise incrementally over time. Similar to the home equity loan, you may be able to deduct your interest during tax season (if you itemize your deductions when you file) if the money is used to “buy, build or substantially improve” your home. After the 2025 tax year, there may be more flexibility to deduct interest, no matter what you spend the money on.
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How Does The Home Equity Loan And HELOC Tax Deduction Work?
The TCJA limits when homeowners can take the home equity loan or HELOC tax deduction, but there are still ways to qualify for this tax break.
For example, if you own a home and take out a home equity loan for $100,000 to add a room and prove you used the entire $100,000 for that purpose, you can deduct the mortgage interest paid. On the flip side, if you take out a loan for $200,000, use $100,000 for home improvements and the other $100,000 for credit card debt consolidation, you can deduct only the interest on the first $100,000 used to renovate your home. This is because the funds used for debt consolidation aren’t deductible.
Here’s another example. Let’s say you borrow $100,000 from your home’s equity and use the funds to pay for your child’s college education instead of taking out student loans. You can’t take the tax deduction because you didn’t use the funds for a primary residence or second home.
The same examples would be true for a HELOC. If you take a line of credit from your home’s equity for $100,000 but use only $20,000 to make major home upgrades like new windows, you can deduct only the interest from the $20,000, not the whole line of credit, because you are charged interest only on the amount of credit you use. If you use the $20,000 to paint your home’s interior, you cannot deduct the interest because painting may be considered a cosmetic change.
The good news? After 2025, as of now, you may be able to deduct the interest you borrow from a home equity loan or HELOC without having to meet any requirements, according to the IRS.
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How To Claim Your Tax Deduction
If you’ve recently used a home equity loan for home improvements or to build a house, you might be eligible for the related tax deduction. To take advantage of this tax benefit, follow these steps:
1. Confirm Your Eligibility
First, determine if your loans meet the IRS requirements for the home equity loan tax deduction, including:
- Your first mortgage and home equity loan must not exceed the $375,000 or $750,000 limit ($500,000 or $1 million if they are from before December 2017), depending on your tax filing status.
- The loans must be for your primary or secondary home (not an investment home).
- The loans must be less than your home’s value.
- You must use the funds to buy, build or substantially improve a home, which means it adds monetary value to the abode, like adding on a new room, replacing a roof or remodeling a kitchen beyond just cosmetic repairs.
2. Review Your Home Improvement Receipts
You must provide receipts, bank statements, contracts and proof of payments made to contractors or other home improvement companies. In addition, you must prove how you used the funds so that there’s no question it was used for anything other than your home. One easy way to do this is by asking your contractor or builder to provide itemized receipts for every purchase of materials, along with documentation for time and labor on the site.
3. Assess Your First And Second Mortgages
To determine if you can take the interest deduction, look at the most recent statements from your first and second mortgages. The loans must not exceed the IRS threshold for limited deductions of interest up to $750,000 (loans taken out after December 2017) for joint filers and $375,00 for single or separate tax filers. It takes only a few minutes to determine if your loans qualify. Any amount above the limit won’t be eligible. If you aren’t sure of your loan amount, you can contact your lender or reference your closing documents to determine how much you borrowed.
4. Prepare Your Documents
When you’re ready to do your taxes or if a tax accountant does them, you’ll need to gather and prepare your documents.
To take the home equity loan or HELOC (both forms of second mortgages) tax deduction, you must prepare your 1040 tax form by providing the amount of interest paid on your loans used for major home improvements or home-related costs.
You can usually find this and other necessary tax forms on the IRS website, or let your tax accountant know you will be deducting your interest. They will know what to file for you.
After you fill out your 1040, it should be a straightforward process to transfer the numbers from the mortgage interest statement tax form 1098; however, if you paid additional interest that isn’t reported on the 1098, provide the necessary documentation to prove the payments. This includes receipts showing the work was done, loan statements and even banking details.
The IRS typically uses the numbers provided on the official tax documents sent to you by your lender.
If you are concerned about taxes, you can get assistance by filing online yourself using tax preparation software, hiring a tax accountant or using a tax preparation company.
5. Itemize Your Deductions
The only way to take the interest deduction is to itemize your deductions. Since the standard deduction has increased so much, it’s important to compare your itemized deductions to the standard deduction to ensure you take the one worth more.
For the 2025 tax year, the standard deduction is $15,000 for single filers and $30,000 for those who are married and filing jointly.
First, add up your itemized deductions to determine if they exceed these amounts. Then, include any other itemized deductions you’re eligible for to see which deduction is greater. There are pros and cons to taking itemized versus standard deductions on your taxes.
Standard vs. Itemized Deductions
| Pros | Cons |
|---|---|
| Taking the standard deduction makes it easier to file (especially when you use tax preparation software) because you don’t need to keep track of any expenses and won’t need to track down receipts. | If your state and local taxes, like for your property taxes, exceed the standard deduction, itemizing might save you money. |
| If you have a lot of deductions, your refund could potentially be higher than if you take the standard deduction. | It is more work to file using itemized deductions because you will need to account for each item and provide the necessary paperwork. If you are not organized, you or your tax accountant may have a hard time. |
Tax Deduction Examples
Let’s say, for example, you paid $10,000 in interest on your first loan and $3,000 on your second mortgage. If you don’t have any other itemized deductions and you’re married filing jointly, it wouldn’t make sense to take the itemized deductions, so you won’t deduct your home equity loan interest.
In other words, you can deduct more with the standard deduction of $27,700 than the $13,000 you’d itemize for your mortgage interest. In this scenario, you don’t need to claim the home equity loan tax deduction to save money on your tax return.
If, on the other hand, you have itemized deductions that, together with the home equity loan interest, exceed $27,700 (for married and filing jointly taxpayers), it makes sense to do the legwork and itemize your deductions to lower your tax liability.
If you have any questions or difficulty, it’s wise to consult a tax professional.
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FAQ
The Bottom Line: Home Equity Loan Interest Can Be Tax Deductible
Home equity loans can help you use your home’s equity. If you use them to improve your home or build a second home, you may be eligible to take a tax deduction on the interest paid.
With rising home values, many homeowners today have equity in their homes to use however they want. If you’re ready to tap into your equity, today.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
