Are home equity loans and HELOC interest tax deductible?

Home equity interest can be tax deductible when specific conditions are met

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While there are a nearly endless number of ways to borrow money these days, home equity loans and home equity lines of credit (HELOCs) let you access a lump sum of cash or a line of credit while using your property's value as collateral. Funds accessed through a home equity loan or HELOC can then be used for nearly any purpose, from major home renovations to a once-in-a-lifetime trip or the consolidation of high-interest debt.

It's also commonly reported that interest paid on home equity loans and HELOCs is deductible on your taxes, yet this is only true when certain circumstances apply. Read on to find out who can deduct home equity interest on their tax returns, how this deduction works and when it can be applied.

Key insights

Home equity loans and HELOCs make it possible to borrow against the equity you have in a property without changing your primary mortgage.

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Interest on these loans may be tax deductible if you itemize when you file your taxes and meet other conditions set by the IRS.

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The most important IRS guideline for when you can deduct home equity interest is a requirement to use the loan funds to buy, build or improve a property you own.

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Is a home equity loan or HELOC tax deductible?

Even though home equity loans and HELOCs both let you borrow against any built-up equity you have in a property, these loans don't work exactly the same. Home equity loans offer a lump sum of money upfront and let you pay it back with a fixed monthly payment and interest rate. Meanwhile, HELOCs offer a line of credit you can borrow against (up to limits) with a variable interest rate and a monthly payment that fluctuates based on how much you borrow.

Both types of loans charge interest that can be tax deductible if certain conditions are met. Fred Freifeld, a certified public accountant with Fiske, a firm in South Florida, points to IRS guidelines on deducting home equity interest as the main rules to follow.

To deduct home equity interest on your taxes, the following applies through 2025:

  • You must have a home equity loan or HELOC secured by a primary or second home.
  • According to the IRS, home equity funds must be "used to buy, build, or substantially improve the residence.”
  • Interest on the same debt that's ultimately used to pay for other expenses is not deductible.

The IRS also notes that the rules may be different starting in 2025 if nothing changes.

"For tax years before 2018 and after 2025, for home equity loans or lines of credit secured by your main home or second home, [the] interest you pay on the borrowed funds may be deductible, subject to certain dollar limitations, regardless of how you use the loan proceeds," the IRS writes.

» MORE: Reverse mortgage vs. home equity loan vs. HELOC

What are the rules for getting the home equity interest deduction?

Based on the IRS guidelines, understanding when home equity interest can (and can't) be deducted is relatively easy. Essentially, you can deduct interest paid on loan amounts you use to buy, build or improve your property. This could entail a project as big and expensive as adding an addition or garage to your house or undergoing a major kitchen renovation.

However, this rule could also apply if you use home equity funds to add an outdoor deck to your home or upgrade your carpet or kitchen appliances. The IRS states that you must "substantially improve" your home, but this is subject to interpretation.

That said, Freifeld points out that you actually have to itemize when you file your taxes for a home equity interest deduction to apply. This detail is important since the Tax Cuts and Jobs Act (TCJA) increased the standard deduction in 2017. With the standard deduction for American households much higher now than in the past (currently at $29,200 for married couples filing jointly and $14,600 for single filers for the 2024 tax year), fewer people itemize on their taxes than they did before 2017.

How to claim the home equity interest deduction

While the IRS doesn't always report the percentage of Americans who itemize on their taxes each year, its data shows that only 9.3% of all tax returns in 2020 were itemized instead of taking the standard deduction. If you’re part of this minority of taxpayers who itemize, the following steps can help you claim the home equity interest deduction.

Make sure the loan qualifies for a deduction

First, make sure you use the home equity funds to improve your property, per IRS guidelines. Also, note that there are limits on how much home equity loan interest can be deducted in a given year.

The interest deduction cap is set at $375,000 in home debt for married couples filing separately and $750,000 in debt for married couples filing jointly and single filers. Note that higher limitations can apply ($1 million ($500,000 if married filing separately) to mortgage-related debt incurred before Dec. 16, 2017.

Collect documents and receipts

Make sure to gather and organize receipts related to the expenses you're using to justify your home equity interest tax deduction. These could include copies of bills sent to you by contractors, receipts for equipment or supplies, and documentation and receipts supplied to you by home remodeling companies.

Complete paperwork

Finally, you'll want to deduct expenses for home equity interest using Schedule A (Form 1040), line 8a. Once you report the deduction and file your taxes, you should store receipts and other documentation that support your deduction for at least three years.

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    What forms do I need to deduct my home equity loan interest?

    You can apply for the home equity loan interest deduction using Schedule A (Form 1040), line 8a.

    Is HELOC interest tax deductible?

    HELOC interest can be tax deductible if you used the loan proceeds to buy, build or improve an eligible residence and if the taxpayer itemizes on their taxes in the first place.

    Should I get a HELOC if the interest isn't deductible?

    Home equity loans and HELOCs still offer a smart way to borrow if you don't plan to use the funds to buy or improve a home. These loans use the value of a property as collateral. So, they tend to come with competitive interest rates and fair terms. The best home equity rates are also considerably lower than the average interest rates charged by credit cards.

    Bottom line

    Home equity interest may or may not be deductible depending on your situation, and remember that current rules only apply through 2025. Either way, home equity products offer a smart and thoughtful way to borrow money using your home equity. Rates can be low since these loans are secured with collateral, and applying for a home equity loan or HELOC doesn't require you to make changes to your primary mortgage (if you have one).

    If you can deduct interest paid on a home equity loan product, the tax savings you'll receive may just be icing on the cake.

    Article sources

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

    1. IRS, "Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2." Accessed March 20, 2024.
    2. Tax Foundation, "Standard Deduction." Accessed March 20, 2024.
    3. Legal Information Institute, "Tax Cuts and Jobs Act of 2017 (TCJA)." Accessed March 20, 2024.
    4. Federal Trade Commission, "Home Equity Loans and Home Equity Lines of Credit." Accessed March 21, 2024.
    5. IRS, "IRS provides tax inflation adjustments for tax year 2024." Accessed March 20, 2024.
    6. IRS, "Individual Income Tax Returns, Preliminary Data, Tax Year 2020." Accessed March 20, 2024.
    7. IRS, "Publication 936 (2023), Home Mortgage Interest Deduction." Accessed March 20, 2024.
    8. IRS, "How long should I keep records?" Accessed March 20, 2024.
    9. Federal Reserve, "Consumer Credit - G.19." Accessed March 20, 2024.
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