As of 2024, US home equity loan debt has reached a new high of $376 billion. This indicates a rising trend among homeowners to capitalize on the equity they have built in their properties.
While home equity is a financially valuable tool, can you deduct the tax on loans against it? The answer hinges on how you use the loan proceeds. Financial calculations become more nuanced while factoring tax ramifications, and possible deductions.
Make an informed decision while considering debt consolidation. Houzeo connects you with 140+ lenders who specialize in home equity loans.
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Is Home Equity Loan Interest Tax Deductible?
The good news is that interest on your home equity loan is tax-deductible. Whether you can benefit from it depends on factors like when you borrowed, how much, and what you used it for.
IRS guidelines state that to claim tax deductions, you must use your home equity to fix your primary or secondary residence. Subsequently, you can write off a portion of the interest on a home equity loan used to remodel your home.
Tax Rules for Home Equity Loan Interest
Prior to the Tax Cuts and Jobs Act (TCJA) going into effect in 2017, homeowners could write off all of the interest paid on their home equity loans annually. However, things changed after the new law was implemented.
Current Deductions on Home Equity Loans
- Home equity loans after Dec 15, 2017, qualify for a smaller tax deduction due to new limits.
- This limit encompasses loans on both primary and secondary homes.
- Married individuals filing separately can claim a deduction on loan interest up to $375,000.
How Much Home Equity Loan Interest is Tax Deductible?
The home equity loan interest deduction for tax purposes depends on when you took out the loan. Below is the table outlining the total tax deductible as per your tax filing status:
| Tax Filing Status | Before Dec 16, 2017 | After Dec 15, 2017 |
| Joint filing | $1,000,000 | $ 750,000 |
| Individual filing | $500,000 | $ 375,000 |
First, you need to establish the tax deductibility of home equity loan interest according to the loan’s start date and tax filing status. Then, you need to make sure your tax return accurately reports the interest.
Save thorough documentation of the amount of money you borrow and the interest you pay each year. See a tax expert if you are unclear about your eligibility or reporting needs to prevent any problems with the IRS.
Home Equity Loan Interest Tax Deduction Limitations
It’s important to know the guidelines and restrictions governing tax deductions for home equity loans. This will help you avoid facing IRS penalties, financial strain, and missing out on or overestimating tax benefits.
The deduction is available only for primary and secondary home mortgage loans utilized for building or remodeling a house. To claim home equity loan interest deductions on your taxes, you need to list out those costs separately if they’re higher than the standard limits.
These limits are:
- $14,600 for single filers or married couples filing separately.
- $29,200 for married couples filing jointly.
- $21,900 for heads of households.
You cannot claim a tax deduction on your home equity loan if your borrowing is more than the value of your house. As a result, maintaining positive equity is a must.
How to Claim Home Equity Loan Interest Deduction?
To claim tax deductions for home equity loans, you need to meet the criteria laid down under the Tax Cuts and Jobs Act (TCJA), 2017. Follow the detailed steps below to ensure a smooth deduction process:
Ensure That Your Loan Qualifies
Consider the following points to ensure that your home equity loan interest qualifies for tax benefits:
- Your mortgage loan should not be more than $750,000. Remember, it includes the primary home and the secondary one.
- Ensure that the home on which you used the fund is the collateral of the loan.
- The loan should be used to repair your home such as fixing the roof, a room addition, renovating the kitchen, etc.
Keep Your Mortgage Statements and Documents Ready
Provide mortgage notes indicating borrowing amounts, receipts, contracts, and proof of expenditure to verify fund use. Mortgage deeds and closing disclosures are also necessary to showcase the use of money.
Itemize Your Deduction
Add up the total payments allowed for tax deductions to find qualifying amounts, such as mortgage interest. However, you can also write off home equity taxes and mortgage points if those are on your primary residence.
Consider Your Mortgage Points
Mortgage points, also called loan origination fees, can be tax deductible. If the loan is for your primary residence, this reduces taxable income. Deductible points vary based on payment method.
Comparing Home Equity Loans and Home Equity Lines of Credit (HELOCs):
Home Equity Loans:
As a homeowner, you can take out a one-time lump sum loan by using your home equity as security.
Key factors:
- Lump Sum Borrowing: You can receive a large amount of money and pay it back over a fixed period of time.
- Fixed Interest Rates: The current fixed interest rate averages around 8.66%. This can help you avoid trouble during market volatility, and subsequent financial difficulty.
- Predictable Repayment: Your knowledge of the precise amount you must pay back each month can make budgeting easier.
- Tax Deductibility: If interest on home equity loans is utilized for qualifying home improvements, it may be tax deductible.
» Estimate Your Home Equity: You can estimate your home equity with Houzeo’s most accurate home value estimator. This is free and online, giving you an estimated home market value.”
Home Equity Lines of Credit (HELOCs):
Essentially a revolving line of credit, HELOCs let you take out loans against the equity in your homes as needed.
Key factors:
- Revolving Credit: Like credit cards, HELOCs give you as-needed access to money.
- Varying Interest Rates: Monthly payments on HELOCs may change as interest rates do.
- Flexible Repayment: Payments can be made throughout the draw period—which is usually five to ten years. Moreover, you are free to borrow and repay the money several times.
- Tax Deductibility: It is similar to the conditions for home equity. HELOC interest is tax deductible if utilized for home improvements.
Alternatives to Home Equity Loans
There are several alternatives to home equity loans:
- Cash-out refinance
- Personal loans
- Credit cards
- 401(k) loan
- Home equity investment
- Reverse mortgage
However, the alternatives have different terms, repayment schedules and interest rates. Separate conditions also exist for the money you receive to become tax deductible. We advise you to consult with a tax expert to find a financing option best suited to your needs and tax savings goals.
The Bottom Line
Home equity loans offer access to easy capital when you need it the most. It allows you to borrow between 80% and 85% of the equity in your homes. Besides, the interest on home equity loans is tax-deductible.
Once you outline your tax savings goals, you will need to find a lender offering the best terms for your home equity loan. Houzeo can ease this process for you with its exquisite repository of local mortgage lenders.
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Frequently Asked Questions
What forms will I need to deduct my home equity loan interest?
To qualify for tax deductible home equity loan interest, gather a copy of the 1098 form and a closing disclosure. You will also need receipts for all home purchase costs alongside a loan application form.
What other tax breaks can homeowners get?
Popular tax deductions for homeowners include breaks on property tax, mortgage interest, home office expenses, mortgage insurance, and homestead deductions. These deductions help homeowners reduce their taxable income and save on their annual tax bill.
What happens if I obtain a home equity loan and then sell my house?
If a house with an existing home equity loan is sold, the loan balance must be repaid with the sale profits. This repayment may affect equity and financial results.
When are home equity loans tax deductible?
Home equity loans are tax-deductible when used to buy, construct, or remodel a primary or secondary residence. This covers the costs incurred in buying or remodeling the house.
Is HELOC interest tax deductible?
Yes, HELOC interest is tax deductible. However, HELOCs are subject to being used under the same criteria as home equity loans to qualify for tax savings.
