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Are home equity loans tax-deductible?

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A home equity loan is one way to access the equity in your home for a variety of different purposes. In addition to using the money for home improvement projects, many borrowers use home equity loans to finance debt consolidation or other large purchases like investments or higher education. While the interest paid on home equity loans can be tax-deductible, there are some limitations.

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Key takeaways
  • Joint filers who took out a home equity loan after Dec. 15, 2017, can deduct interest on up to $750,000 worth of qualified loans, while single filers can deduct interest on up to $375,000. The loan proceeds, however, must be used to “buy, build or substantially improve” the home that was used to secure the loan.
  • Substantial improvements are those that add value to the home, prolong its useful life or adapt a home to new use.
  • To take advantage of this tax break, you’ll need to itemize your deductions at tax time.

Is home equity loan interest tax-deductible?

Filing jointly Home equity loan closed after Dec. 15, 2017 Can deduct interest on up to $750,000 of debt
Filing jointly Home equity loan closed prior to Dec. 15, 2017 Can deduct interest on up to $1 million of debt
Filing separately Home equity loan closed after Dec. 15, 2017 Can deduct interest on up to $375,000 of debt
Filing separately Home equity loan closed prior to Dec. 15, 2017 Can deduct interest on up to $500,000 of debt

Whether or not you can deduct the interest paid on your home equity loan depends on when you took out your loan, how much you borrowed, what you used the funds for and whether it makes more sense to itemize or take the standard deduction.

With the passage of the Tax Cuts and Jobs Act of 2017, joint filers who took out their home equity loan after Dec. 15, 2017, can deduct interest on up to $750,000 worth of qualified loans, while separate filers can deduct the interest on up to $375,000.

However, the funds from the loan must be used to “buy, build or substantially improve” the home that was used to secure the loan. This means that you can no longer deduct the interest on home equity loans that you use to pay off debt or put toward an emergency expense.

Those limits also include any mortgage loans currently outstanding. For example, if you still have a mortgage balance of $500,000, only $250,000 of home equity loans will be eligible for tax deductions.

If you took out your home equity loan prior to Dec. 15, 2017, your limits are higher, at $1 million for joint filers and $500,000 for separate filers, as long as the funds were used to buy, build or improve the home.

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.

How to claim home equity loan interest deduction

1. Know where you stand with both mortgages

The loan you first took out to buy the home is your first mortgage, and the home equity loan is your second mortgage. Both mortgages must fit IRS requirements. Combined, the debt must:

  • Not exceed $750,000 or $1 million, depending on when the loans were taken out
  • Be secured by a “qualified residence,” which can be your main home or second home
  • Not exceed the value of the residence(s)
  • Be used to acquire or substantially improve the residence(s)

You can find the dollar amounts of your mortgage and home equity loan on your most recent billing statements or by calling your loan servicer.

Next, confirm whether the home equity loan was used to buy, build or improve your home. Here’s a rule of thumb: A “substantial” improvement is one that adds value to the home, prolongs its useful life or adapts a home to new use. While the IRS doesn’t offer a full catalog of expenses that fit this description, here are a few examples:

  • Building an addition to the home
  • Installing a new roof
  • Replacing an HVAC system
  • Completing an extensive kitchen remodeling project
  • Resurfacing the driveway

2. Gather your documents

To deduct home equity loan interest on your tax return, gather the following documents:

  • Mortgage interest statement (Form 1098) – This form is provided by your home equity loan lender and shows the total amount of interest paid during the previous tax year.
  • Statement for additional interest paid, if applicable – If you paid more home equity loan interest than what’s shown on your Form 1098, you’ll need to attach a statement to your tax return with the additional amount of interest paid and an explanation of the discrepancy.
  • Proof of how home equity funds were used – Keep receipts and invoices for any expenses that significantly improve the value, longevity or adaptability of your home. This includes costs for materials, labor and permits needed for the improvement.

3. Itemize your deductions

To take advantage of this tax break, you’ll need to itemize your deductions at tax time. That’s only worth doing if all of your deductions add up to more than the amount of the standard deduction for the 2021 or 2022 tax years:

Married filing jointly Filing separately/single Head of household
2021 $25,100 $12,550 $18,800
2022 $25,900 $12,950 $19,400

You can either take the standard deduction or itemize — not both.

After totaling your itemized expenses, including your home equity loan interest, and comparing them to your standard deduction, you have to decide whether itemizing is to your advantage.

For instance, say you paid $2,600 in interest on a home equity loan and $9,100 in interest on your mortgage in 2021. You’re filing a joint return, and these are the only deductions you can itemize for a combined value of $11,700. Because $11,700 is far lower than the standard deduction of $25,100, it doesn’t make sense to itemize just so you can deduct the interest you paid. However, it’s always wise to speak to a tax professional to explore your options before proceeding.

If you do end up taking the home equity loan interest deduction, it would be claimed on IRS tax form Schedule A, Itemized Deductions.

Bottom line

The interest on a home equity loan is tax-deductible provided the funds were used to buy or build a home, or make improvements to one, as defined by the IRS. However, if the combined interest on your first mortgage and home equity loan, plus any other itemized deductions such as state and local taxes, is less than the standard deduction for the tax year, it’s better to take the higher standard deduction instead of itemizing. As with any tax consideration, consult with a professional when deciding how to prepare your return.

Written by
Kim Porter
Contributing writer
Kim Porter is a former contributor to Bankrate, a personal finance expert who loves talking budgets, credit cards and student loans. Porter writes for publications such as U.S. News & World Report, Credit Karma and Reviewed.com. When she's not writing or reading, you can usually find her planning a trip or training for her next race.
Edited by
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