Are home equity loans tax deductible

If you’re a homeowner and need to access cash, you might consider taking out a home equity loan. A home equity loan allows you to borrow money using the equity in your house as collateral. This type of loan can be beneficial if you need to finance a home renovation, pay off debt, or cover an unexpected expense like a medical bill. 

Like most loans, home equity loans have interest, which is the cost of borrowing money from your lender. However, home equity loan interest is sometimes tax deductible. Here’s what you should know about deducting home equity loan interest on your taxes, including who is eligible and what forms are needed.

Is interest on home equity loans tax deductible?

The interest you pay on a home equity loan is tax deductible, but only if you use the money to “buy, build, or substantially improve your home,“ in the words of the IRS.

For example, if you take out a home equity loan to remodel your bathroom or kitchen, you would be allowed to deduct a portion of the interest on your taxes. You could not, however, deduct the interest if you used the money to pay off credit card debt.

How much home equity loan interest is tax deductible?

The IRS only allows you to deduct a certain amount of home equity loan interest. The exact amount depends on when you took out the loan, as well as your total mortgage debt and your tax filing status.

For home equity loans received before December 2017, the IRS allows interest deductions on mortgage debt up to $1 million, or $500,000 for married couples filing separately. For loans received after December 2017, the IRS allows interest deductions on mortgage debt up to $750,000, or $375,000 for married couples filing separately.

Limits of the home equity loan interest tax deduction

Not everyone can deduct home equity interest payments on their taxes. If you’re exploring this deduction, it’s important to understand the rules and limitations.

First, you can only deduct home equity loan interest on primary home and secondary home mortgages when you use the money to build or purchase a new home or improve your current home.

Additionally, you can only deduct the interest payments if you take the itemized deduction on your taxes. That means the money you spent must exceed the standard deduction limits for the 2023 tax year, which include:

  • $13,850 for single filers or married couples filing separately.
  • $27,700 for married couples filing jointly.
  • $20,800 for heads of households.

The last major requirement is that you must have positive equity in your home. If you’re upside down on your mortgage, where you owe more on the home than its value, you are not allowed to deduct the interest payments on your taxes.

When are home equity loans tax deductible?

Home equity loan interest, as well as home equity line of credit (HELOC) interest, can be written off your income taxes when you use the money for home improvement purposes, or to purchase or build a new home. You must also itemize your deductions to write off the interest you paid.

Only recently have homeowners been able to deduct home equity loan interest. This write off became available after the Tax Cuts and Jobs Act (TCJA) was passed into law in 2017. According to the TCJA, qualifying homeowners are allowed to deduct their home equity loan interest payments through the 2025 tax year.

Steps to claim home equity loan interest deduction

If you’re thinking about writing off your home equity loan interest on your taxes, it’s important to understand the process. Here’s a basic overview of how you can claim this deduction on your income taxes.

Make sure you’re eligible

To start, review the eligibility requirements for this tax deduction and make sure you meet the criteria. Remember, you can only write off the interest if you used the loan to buy, build, or improve your home, and you have positive equity in your mortgage. If you used the money for personal reasons, you won’t qualify for the deduction. TaxSlayer’s Premium option gives you access to in-house tax professionals via phone or email that can help you figure out where you stand. File your taxes for as low as $19.51 with TaxSlayer! Use Code: SAVE15.

Gather your mortgage documents and receipts

Next, find and organize your tax documentation. Find a recent copy of your mortgage statement, or request one from your lender, to see exactly how much money you’ve borrowed to date. You will also need to gather your receipts documenting how the money was spent. This could be an invoice from a general contractor, a receipt for a new roof, or a receipt for closing costs.

Consider your other deductions

You’re only allowed to deduct home equity loan interest payments if you itemize your deductions. At this point, you should look at your total tax deductions for the year and determine if it’s worth taking the itemized deduction over the standard deduction.

Start by reviewing Form 1098, which you should receive from your lender. This form shows your total mortgage interest payments to date. Factor in other costs you might be able to deduct, like property taxes or mortgage points.

If your total deductions exceed or are close to the standard deduction for your filing status, it’s probably worth taking the itemized deduction, which will allow you to write off your home equity loan interest. On the other hand, if your total deductions fall below the standard deduction, itemizing might not be the best option.

What forms do you need for this interest tax deduction?

To claim this tax deduction, you need to use Schedule A of Form 1040. This is the tax form used to itemize your deductions for the past year. Make sure to add up all your qualifying deductions before you fill out the form. If you use a tax software like TaxSlayer to prepare your return, you should receive instructions for how to fill it out.

While you should have all your mortgage documents and home improvement receipts on hand, you don’t need to submit them to the IRS. However, you should keep these documents organized and accessible for several years. If you get audited, the IRS may ask to see physical proof of how you spent your home equity loan. 

Frequently asked questions (FAQs)

Is interest on a HELOC tax deductible?

Yes, you are allowed to deduct interest on a HELOC. The same rules apply—you can only deduct the interest if you used the money to buy, build, or improve your home, and you itemize your deductions. 

What are some of the benefits of a HELOC?

If you’re comparing a HELOC vs. home equity loan, it’s important to understand the differences and benefits of each. A HELOC is a line of credit, so you can spend the money as you need it. HELOCs are more flexible, but they have variable interest rates. With a home equity loan, you get money in a lump sum and pay it back in installments. Home equity loans have a fixed interest rate, which can be beneficial if interest rates rise.

What other tax breaks can homeowners get?

There are a variety of expenses that homeowners can deduct from their taxes. For example, you can typically write off mortgage interest, discount points, property taxes, and private mortgage insurance (PMI). Some necessary home improvements can also be deducted. However, you can only write off these expenses if you itemize your deductions.