Is Interest from A Home Equity Loan Tax Deductible?

When deciding whether you should apply for a home equity loan or line of credit there are a plethora of items to think over. Although the line, terms, interest rates, and availability of funds are certainly important, many lose sight of the tax obligations for these types of loans. Some recent changes to the tax laws and what is actually tax deductible could leave you with surprises if you don’t research carefully or consult with a tax professional. Prior to 2017, homeowners could deduct the interest from their home equity loans on their taxes. This is still possible, but a new law passed in 2017 added some limitations.

The Tax Cut and Jobs Act of 2017 allows a deduction of mortgage-related interest up to $750,000 for married couples filing jointly. The limit is $375,000 for separate filers for any home purchased after 2017. These laws are in effect for homeowners until 2025. Under the new law, you can only deduct interest on loans used to purchase, build, or renovate your home. Previously, interest could be deducted even if the HELOC was used for non-property related expenses. However, current tax law changed this a bit, and the HELOC must be used for house-related expenses to qualify as tax deductible.

Homeowners have to be careful about how they define home improvements, too. The IRS says a substantial home improvement is one that adds value or prolongs the home’s useful life. An addition or overhauling key structural elements may qualify, but cosmetic upgrades like paint jobs and siding may not. The IRS classifies repairs that maintain your home in good condition as “not substantial improvements.”

Which Loans Qualify for Deductions?

Mortgage-related interest on your primary residence and second home are the only loans that can be included. Eligible loans must be secured by one of these two residences in order to be deducted. Even if you took out your HELOC before 2018, you are subject to the new qualification rules. Even if you previously used HELOC money for medical expenses, college debt, or to start your own business and tax deducted interest charges, you cannot do that this year.

A tax advisor can help you straighten out whether your use of your HELOC qualifies for tax deductions. You should keep all invoices and receipts related to repair costs and renovations to prove the money was spent on the house. If you are ever audited, you can prove your deductions were valid to the IRS.

Deducting Home Equity Interest

Before you can file your taxes in 2019 you should watch for your 1098 forms. These forms should arrive by January 31st. They will come from your mortgage and home equity lenders, many of which are listed on the Home Equity Wiz site, and will show how much interest you paid in 2018. If your loans are near the allowed limits or you used a portion of loans for non-qualifying expenses, you will need IRS Publication 936 to help you calculate your interest deductions. The tax code has become much trickier since 2017, so consult with a tax adviser if you are unsure about the status of your home equity loans.


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