Is interest on a home equity line of credit tax-deductible?

Table of Content

• Which is a better option for me – a home equity loan or home equity line of credit?
• What's the difference between a home equity loan and a home equity line of credit?
• Claiming a home equity loan interest deduction
• Is Home Equity Line Of Credit Interest Tax Deductible
• Is the Interest on My Home Equity Loan Tax Deductible?
• Texas Home Equity Loan FAQ

The answer is you can still deduct home equity loan interest. But the rules have changed, and there are more limitations than ever before. If your interest is less than that, you might not receive a 1098. If the debt on your home exceeds these amounts, you could only deduct part of the interest, Castelli explains. In these cases, it’s a good idea to talk to an accountant to help you figure out what your interest deduction would be.

Many or all of the products here are from our partners that pay us a commission. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Also called a uniform residential loan application, have a copy handy as added proof that the home you purchased was a primary residence or second home. Andrea Riquier is a New York-based writer covering mortgages and the housing market for Forbes Advisor.

Which is a better option for me – a home equity loan or home equity line of credit?

Oftentimes, these loans are used for large projects and goals like home renovations, college education, and debt consolidation. Focus your home equity financing on improving your long-term financial situation. Use it to add value to your home, consolidate and save money on your high-interest debt, pay for education , or pay for a significant emergency that your regular cash flow cannot cover. Many experts recommend against using home equity loans and HELOCs to fund vacations, car purchases, or high-risk investments. If you sell your home, you’ll have to pay off both the primary mortgage and the home equity loan or HELOC balance.

LTV benchmarks typically limit loans to 80%A fin of the home’s appraised value. As of 2017, the rules around deducting interest on home equity loans have changed — and may change again in 2026. You may only deduct interest on $750,000 of qualified residence loans, or the limit is $375,000 for a married taxpayer filing a separate return, according to the IRS. Taking out a home equity loan or a HELOC just to deduct the interest on your taxes was never the best decision, and tax changes make it even less practical. Note that $750,000 is the total new limit for deductions on all residential debt. If you have a mortgage and home equity debt, what you owe on the mortgage will also come under the $750,000 limit—if it’s a new mortgage.

What's the difference between a home equity loan and a home equity line of credit?

Instead, deduct the remaining balance over the term of the new loan. Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. The total amount Bill deducts in 2022 is $550 ($500 + $50).

If you use a home equity loan or HELOC to renovate or improve your home, the interest you pay on it is tax-deductible. But if you use that money for any other purpose, it won't serve as a tax deduction. That includes home repairs -- you can't take a deduction for home equity loan interest if you use the money you borrow to fix a cracked foundation or patch up a damaged roof. Interest on home equity debt is tax deductible if you use the funds for renovations to your homethe phrase is buy, build, or substantially improve.

Claiming a home equity loan interest deduction

The other point ($1,000) was a fee for services and isn't deductible. Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The loan must be secured by the taxpayer’s main home or second home , and meet other requirements.

With a home equity loan, you borrow a certain sum and then pay it back at a fixed rate over a predetermined period of time. Home equity loan closing costs typically range anywhere from 2% to 5% of the loan amount, although some lenders may reduce or waive them altogether. To get a home equity loan with bad credit, you’ll need to jump through more qualifying hoops and will also pay a higher rate than if you have good credit. Capital gains tax laws allow you to keep a portion of the profits tax free when you sell your home. Married couples can keep up to $500,000 of their sale-related gains tax free; for individual filers, the number is $250,000.

Is Home Equity Line Of Credit Interest Tax Deductible

But several factors influence whether or not you can deduct the interest on the loan. It depends on how you spend the money, how much debt you have on your home, and how many other tax deductions you have. Meanwhile, acquisition debt that’s used to buy, build, or improve a home remains deductible, but only up to a limit. Any new loan taken out from Dec. 15, 2017, onward—whether a mortgage, home equity loan, HELOC, or cash-out refinance—is subject to the new lower $750,000 limit for deducting mortgage interest. Using a HELOC to invest in home improvements to your primary residence could be a smart choice if those improvements increase the home’s value and you can deduct the interest payments. On the other hand, using HELOC proceeds to purchase a separate investment property, invest in stocks, or trade cryptocurrency could all be risky moves.

And you would miss out on the opportunity to deduct the interest. Taking out a home equity line of credit may still be worth it even if the interest is not deductible to you, depending on how you plan to use the money. If you’re interested in consolidating credit card debt, for example, and if you can get a much lower rate with a HELOC, then you could save money this way. Of course, this strategy assumes that you’ll pay the HELOC down as quickly as possible to minimize interest charges and that you won’t run up new debt on the cards that you’ve paid off. HELOCs can help you to unlock larger sums of money than you might be able to borrow with a personal loan or a credit card. As a homeowner, you’re able to borrow up to a specified amount based on the combined loan-to-value ratio.

How to get a home equity loan or HELOC

However, if you use the proceeds of the loan for what the IRS deems to be "substantial improvements" to your home, and meet other criteria, home equity loan interest may still be deductible to an extent. Let’s say you took out a home equity loan in 2022 of $200,000. Half of that loan went toward credit card debt consolidation, while the other half went toward the construction of a new home office. In this scenario, any interest you paid on the $100,000 used for your home renovation would be tax-deductible, but the interest you paid on the $100,000 used for debt consolidation would not be.

If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Deduct home mortgage interest that wasn't reported to you on Form 1098 on Schedule A , line 8b. If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number on the dotted lines next to line 8b. The seller must give you this number and you must give the seller your TIN.

Most of the time, when you take on debt, it can't be used to reduce your taxable income. But in some cases, the interest you pay on a home equity loan or HELOC can serve as a tax deduction. In the first scenario, you can avoid mortgage insurance if you take out the first mortgage to 80% and finance another 10% with a home equity loan. Mortgage insurance protects lenders against losses on mortgages they make to homebuyers with less than a 20% down payment. As with any credit product, HELOC lenders will perform a credit check as part of your application, resulting in a temporary dent in your credit score.

You can't have borrowed these funds from your lender or mortgage broker. A home equity line of credit can help cover large expenses or consolidate other high-interest-rate debts. Because a HELOC uses your home as collateral, these loans often offer lower rates than other types of loans, and in some cases, the interest is tax-deductible. Understanding the potential and limits of the mortgage interest deduction can help you properly deduct home equity loan interest and reduce your tax bill. Kim Porter is a former contributor to Bankrate, a personal finance expert who loves talking budgets, credit cards and student loans.

He figures the amount of home mortgage interest he can deduct by using Table 1. Don determines that $15,000 of the interest can be deducted as home mortgage interest. However, if you used any of the loan proceeds for business or investment activities, see the instructions for line 16 next. 13.Enter the total amount of interest that you paid on the loans from line 12. See the line 13 instructions13.14.Divide the amount on line 11 by the amount on line 12.

This is the last year youll be able to take the residential energy credit. Instead of receiving your funds as a one-time loan lump sum, you will have a line of credit open, which allows you to borrow from your financial institution as needed. However, taking out a home equity loan while you’re still paying off your mortgage will mean that you have two payments to make each month. Because of this, it’s important to do the math and consider whether you can afford the monthly payments of a home equity loan. Like a personal loan, you can use funds from a home equity loan to do anything you’d like.