Home equity loans are a common way for homeowners to access cash, but the tax implications of these loans can be complex. In this article, we will explore the rules for deducting home equity loan interest on your taxes, including who is eligible, what types of loans qualify, and how to claim the deduction.
Key Facts
- Qualifying Loans: Home equity loan interest and home equity line of credit (HELOC) interest can be tax deductible if the loans are used for specific purposes such as home improvement, purchasing, or building a new home.
- Loan Limits: The total mortgage debt on a property, including the first mortgage and any second mortgages (HELOC or home equity loan), should not exceed $750,000 for loans taken after 2018. For loans taken before 2018, the limit is $1 million.
- Qualifying Residence: The loans must be secured by a qualifying residence, which can be your primary residence or a second home like a vacation home. The home you used the funds for must be the collateral for the loan.
- Loan-to-Value Ratio: The debt should not exceed the value of the qualifying home(s). If you owe more than the home’s value, you cannot deduct interest on loans that exceed the collateral value.
- Use of Funds: To qualify for the mortgage interest deduction, the funds must be used to buy, build, or improve a qualifying home(s). Examples of substantial home improvements include replacing the roof, adding a room addition, or remodeling the kitchen.
Qualifying Loans
The interest on home equity loans and home equity lines of credit (HELOCs) is tax deductible if the loans are used for specific purposes, such as:
- Home improvement
- Purchasing a new home
- Building a new home
Loan Limits
The total mortgage debt on a property, including the first mortgage and any second mortgages (HELOC or home equity loan), should not exceed:
- $750,000 for loans taken after December 16, 2017
- $1 million for loans taken before December 16, 2017
Qualifying Residence
The loans must be secured by a qualifying residence, which can be:
- Your primary residence
- A second home, such as a vacation home
The home you used the funds for must be the collateral for the loan.
Loan-to-Value Ratio
The debt should not exceed the value of the qualifying home(s). If you owe more than the home’s value, you cannot deduct interest on loans that exceed the collateral value.
Use of Funds
To qualify for the mortgage interest deduction, the funds must be used to:
- Buy a qualifying home(s)
- Build a qualifying home(s)
- Improve a qualifying home(s)
Examples of substantial home improvements include:
- Replacing the roof
- Adding a room addition
- Remodeling the kitchen
How to Claim the Deduction
To claim the home equity loan interest deduction, you must itemize your deductions on your tax return. You will need to provide documentation showing the amount of interest you paid on the loan, as well as how you used the funds.
Conclusion
Home equity loan interest can be a valuable tax deduction for homeowners who use the funds to improve their homes. However, it is important to understand the rules and limitations surrounding this deduction to ensure that you are eligible to claim it.
Sources
- Are Home Equity Loans Tax Deductible?
- Are Home Equity Loans Tax Deductible?
- Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses
FAQs
Can I deduct interest on a home equity loan?
Yes, you can deduct interest on a home equity loan if you use the funds to buy, build, or improve your home.
What are the loan limits for the home equity loan interest deduction?
The loan limits for the home equity loan interest deduction are $750,000 for loans taken after December 16, 2017, and $1 million for loans taken before December 16, 2017.
What is a qualifying residence for the home equity loan interest deduction?
A qualifying residence for the home equity loan interest deduction is your primary residence or a second home, such as a vacation home.
How do I claim the home equity loan interest deduction?
To claim the home equity loan interest deduction, you must itemize your deductions on your tax return and provide documentation showing the amount of interest you paid on the loan, as well as how you used the funds.
Can I deduct interest on a home equity loan if I use the funds to pay off credit card debt?
No, you cannot deduct interest on a home equity loan if you use the funds to pay off credit card debt.
Can I deduct interest on a home equity loan if I use the funds to invest in stocks?
No, you cannot deduct interest on a home equity loan if you use the funds to invest in stocks.
Can I deduct interest on a home equity loan if I use the funds to buy a car?
No, you cannot deduct interest on a home equity loan if you use the funds to buy a car.