Guide to Home Equity Tax Deductions

Table of Content

• When you can’t claim interest on a HELOC
• Refinancing Or A Home Equity Loan: Which Is Right For You
• Member Benefits
• Niche Loan Options
• How Do I Know If My Home Equity Loan Is Tax Deductible?
• Should I Get a Home Equity Line of Credit (HELOC) or a Home Equity Loan for the Tax Deduction?
• How Much Medicare Tax Is Withheld

If youre 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 youll pay the HELOC down as quickly as possible to minimize interest charges and that you wont run up new debt on the cards that youve paid off. So, you could use a home equity loan to refinance credit card debt or pay for a wedding, and it was all deductible as long as you stayed under the $100,000 home equity debt cap. Itemizing deductions allows some taxpayers to reduce their taxable income, and thus their taxes, by more than if they used the standard deduction. 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.

This reflects an overall market trend away from home equity loans and HELOCs and toward refinances, making it harder for consumers to get HELOCs or home equity loans. Check your particular situation carefully with a tax expert before deducting anything, as it doesn’t always make sense financially and the process can be quite complicated. To calculate the percentage of equity that you have in your home, subtract the current balance on any loans that you have on your home from the current estimated value of your home. Deciding between the two depends on your current situation, specifically how much money you need over what time period. Both a home equity loan and a HELOC carry the same risk of foreclosure if you can’t pay them back, or of going underwater if your home’s value goes down significantly.

When you can’t claim interest on a HELOC

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He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. You should talk to your CPA if you have questions about how much you’re allowed to deduct. However, having one loan that has been grandfathered does not make other loans the same status. For instance, if you owe $800,000 on a loan that was taken out in 2016, you are not allowed to take out another loan for $200,000 this week and deduct mortgage interest on the entire $1 million.

Refinancing Or A Home Equity Loan: Which Is Right For You

Using the HELOC funds for anything other than buying, building or substantially improving your home renders the interest nondeductible. This means you can’t deduct HELOC interest if you use the funds to pay for a wedding or vacation or refinance other debts. That generally means your total itemized deductions must be greater than the standard deduction available for your filing status.

You can borrow money against the value of your home with a home-equity loan or a home-equity line of credit. Both provide access of up to 100% or more of the equity in your home. Since the tax law changed in 2017, the tax deductibility of interest on a HELOC or a home equity loan depends on how you are spending the loan funds. That applies to interest on loans that existed before the new tax legislation as well as on new loans. Under IRS rules, you can only deduct the interest from mortgages up to $750,000 .

Member Benefits

RefiGuide.org is a website that provides information about mortgages and we do not directly offer mortgages, accept applications or approve loans but we work with partners who do. This service is completely free and there is no obligation when you receive quotes from any of the mortgage companies. If you have a 4% interest rate, you only are allowed to deduct $40,000 instead of $80,000. The limit does not apply to legacy debt, but you cannot deduct more interest if the legacy debt is already more than $1 million. So if you have $900,000 in legacy debt, you only are allowed to write off interest for $100,000 of home debt.

Nov 1, 2019 — The Tax Cuts and Jobs Act of 2017 suspended from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit. Good news – the IRS announced that in many cases, taxpayers can continue to deduct interest on home equity loans under the TCJA. Home Equity Lines of Credit, also known as HELOCs, are loans that are secured by your primary residence, and they offer a revolving line of credit to meet your borrowing needs. For example, if youre planning on a home renovation, you can borrow new funds for each step of your project, rather than as a single lump sum. Mortgage interest rates are high right now, so refinancing may not be your best option if your mortgage has a significantly lower interest rate than is currently available.

When in doubt, be sure to consult an accountant to help you navigate the new tax rules. CU SoCal does not provide and is not responsible for the product, service or overall website content available at these sites. The privacy policies of CU SoCal do not apply to linked websites and you should consult the privacy disclosures on these sites for further information. However, each individual’s situation is unique and you should speak with your tax preparer or a tax professional about your filing options. Let’s say you paid $2,000 in interest on a HELOC and $10,000 in interest on your mortgage in 2021. The mortgage is a secured debt on a qualified home in which you have an ownership interest.

On the other hand, if you are trying to use your home like a piggy bank to fund your lifestyle, you will not be able to deduct the interest. Your plan to pay for Junior’s college with home equity might also be out the window. Likewise, you can no longer use the money to pay off credit cards or use it to buy that new car you’ve been eyeing. Mike Kinane, head of consumer lending at TD Bank, said the bank saw “a bit of a slowdown” in applications, and a slight increase in borrowers paying off larger lines of credit, before the I.R.S. clarification. But, he said, home equity remains an option for homeowners to borrow large amounts of money at competitive rates. “It still is, and will continue to be, a great borrowing tool for consumers,” he said.

Niche Loan Options

Homeowners can now deduct interest paid to home equity loans and HELOCs if they use the money to buy, build, or substantially improve a home secured by the loan. For home equity line of credit interest to be tax-deductible, you must use the funds to purchase, build or substantially improve the home securing the line of credit, according to IRS guidelines. If you need cash and have equity in your home, a home equity loan or a home equity line of credit can be an excellent solution. But the tax aspects of either option are more complicated than they used to be. Interest on a HELOC may be tax deductible—but there are conditions. John Lieberman, a New York City certified public accountant, says more than half his clients use home equity loans to help buy or renovate their primary residences or second homes.

The high standard deduction means that even those who can claim a home equity tax deduction may not find it advantageous to do so. If your home equity loan or HELOC is used to go snorkeling in Cancun or open an art gallery, then that’s home equity debt. However, if you’re using your home equity loan or HELOC to overhaul your kitchen or add a half-bath to your house, then it’s acquisition debt. Interest is also fully deductible if the money is used to make major improvements. This can include renovating the kitchen and bathrooms, finishing the basement, or putting an addition on the house. The tax-deductibility of HELOC interest is similar to when other money is borrowed to make improvements to your home.

How Do I Know If My Home Equity Loan Is Tax Deductible?

“There was a lot of concern that these were no longer deductible for those purposes,’’ he says. Well, home equity debt and lines of credit may no longer be used for simply any purpose and still be deductible. As noted above, if you’re married and filing a joint return, you only can deduct interest on $1 million or less of home debt, and $100,000 or less of home equity debt. The new limits are applicable to the combined dollar amounts of loans that are taken out to build, buy or improve the home and second home.

So getting approved for a HELOC without a tax return may be challenging. Basic maintenance, such as painting or minor repairs, isn’t considered a "substantial" improvement. So you can’t deduct interest on a HELOC used for these expenses unless they’re part of a larger remodeling project. If you’re considering a cash-out refinance instead of a HELOC, Credible makes it easy to compare rates in minutes. See HSH.com's Annual Market Outlook for 2023, our long-range forecast for mortgage rates, home prices, home sales and lots more. A home equity loan is a consumer loan allowing homeowners to borrow against the equity in their home.