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Are Home Equity Loans Tax Deductible?

4-Minute Read
Published on October 12, 2022

A home equity loan can help you access your home’s equity. You don’t have to tell a lender how you’re using the funds, but the IRS is interested because it can help determine if you can take the home equity loan tax deduction.

Recent law changes have people wondering … Are home equity loans tax deductible?

They can be in some situations, including interest paid on your second home. Here’s what you should know.

Is Interest On Home Equity Loan Tax Deductible?

Is home equity loan interest tax deductible? According to the 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. Homeowners can take the interest deduction on up to $750,000 in equity loans or up to $1 million for loans taken before 2018.

However, any home equity funds used for 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 investment homes. However, investment homes have other tax deductions you can take advantage of to lower your tax liabilities.

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When Are Home Equity Loans Tax Deductible?

The Tax Cuts and Jobs Act of 2017 limited when homeowners can take the home equity loan tax deduction. However, there are still ways to get the deduction.

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.

However, if you took out a loan for $200,000, used $100,000 for home improvements, and the other $100,000 for credit card debt consolidation, you could only deduct the interest on the first $100,000 used to renovate your home. This is because the funds used for debt consolidation aren’t eligible.

Here’s another example.

You borrowed $100,000 from your home’s equity and used the funds to pay for your child’s college education instead of taking student loans. You cannot take the tax deduction because you didn’t use the funds for a first or second home.

Turn your home equity into cash.

See how much you could get. Apply online with Rocket Mortgage® today.

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How Do You Claim A Home Equity Loan Tax Deduction?

You must keep careful records to claim the home equity loan tax deduction. First, determine if your loans meet the IRS requirements, including:

  • Both loans must not exceed the $750,000 limit ($1 million if they are from before 2018)
  • 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 improve a home

Keep Detailed Records

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 there’s no assumption it was used for anything other than to do with your home.

Your receipts should include any costs from home improvements, including labor, materials, permits or any other costs.

The more records you have for how you used the funds, the easier it is to take the mortgage interest deduction because it must be proven beyond a reasonable doubt.

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 mortgage. The loans must not exceed $750,000. It takes only a few minutes to determine if your loans qualify. Any amount above $750,000 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.

Prepare Necessary Documentation

To take the home equity loan tax deduction, you must prepare your 1040s by providing the amount of interest paid on your loans.

It should be straightforward to transfer the numbers from your 1098; however, if you paid additional interest that doesn’t report on the 1098, provide the necessary documentation to prove the payments.

Remember to have as much documentation as possible. The IRS typically uses the numbers provided on the official tax documents sent to you by your lender.

Itemize 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 2022, the standard deduction is $12,950 for single filers and $25,900 for married filing jointly filers.

Add your itemized deductions up to see if they exceed these amounts. Then, include any other itemized deductions you’re eligible for to see which deduction is greater.

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 are married filing jointly, it wouldn’t make sense to take the itemized deductions so you won’t deduct your home equity loan interest.

If, on the other hand, you had itemized deductions that, together with the home equity loan interest, exceeded $25,900 for married 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.

Apply for a Home Equity Loan online.

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Is Interest On A HELOC Tax Deductible?

When you tap into your home’s equity, you have two options: a home equity loan and a home equity line of credit. While they operate differently, they have the same tax rules. If you borrow a HELOC, you must prove any funds you draw and pay interest are used to buy, build, or improve your home.

The Bottom Line: Home Equity Loans 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 the tax deduction on the interest paid.

With rising home values, many homeowners today have equity in their homes to use how they need. If you’re ready to tap into your home’s equity, apply for financing today.

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Sam Hawrylack

Samantha is a full-time personal finance and real estate writer with 5 years of experience. She has a Bachelor of Science in Finance and an MBA from West Chester University of Pennsylvania. She writes for publications like Rocket Mortgage, Bigger Pockets, Quicken Loans, Angi, Well Kept Wallet, Crediful, Clever Girl Finance, AllCards, InvestingAnswers, and many more.