Is interest on a home equity line of credit tax deductible?
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A home equity line of credit (HELOC) can help cover large expenses or consolidate other high-interest debt. Because a HELOC uses your home as collateral, these loans often offer lower rates than other types of loans, and in some cases the interest is tax deductible.
Credible does not offer HELOC, but you can compare cash refinance rates.
The short answer is: Maybe. That your home equity loan interest is tax deductible depends on two factors:
- How you spend the funds (and where you spend them)
- The total amount of your mortgage debt
To qualify for the deduction, you must itemize the deductions. This generally means that your total itemized deductions must be greater than the standard deduction available for your filing status.
For the 2022 tax year (tax returns filed in 2023), the standard deductions are:
- $25,900 for married couples filing jointly
- $12,950 for single taxpayers and married persons filing separately
- $19,400 for heads of families
If the total of your itemized deductions – including mortgage interest, state and local taxes, and charitable contributions – is less than the standard deduction available for your filing status, you will not qualify for the deduction of interest paid on a HELOC. .
To be tax deductible, you must meet all of the following conditions:
Use the funds to “buy, build or significantly improve” your property
For interest on the home equity line of credit to be tax deductible, you must use the funds to purchase, build, or substantially improve the home securing the line of credit, per IRS guidelines.
When it comes to HELOCs, that usually means getting a HELOC to pay for a renovation project that adds value to the home, like a new kitchen.
The project must also improve the property securing the loan. So, for example, if you take out a HELOC on your primary residence and use the funds to buy, build, or improve a vacation home, the interest is not deductible.
Have less than $750,000 in total mortgage debt
You can only deduct interest on a maximum mortgage debt of $750,000, including your first mortgage and any home equity loans or lines of credit. The limit is half ($375,000) for married couples filing separate returns.
For example, suppose your first mortgage balance is $700,000 and you take out a $100,000 home equity line of credit to renovate your kitchen. In this case, you could deduct all the interest on your first mortgage, but only half of the interest paid on your HELOC. The rest would be non-deductible because your total debt exceeds the $750,000 limit.
One of the advantages of a HELOC Compared to other types of loans, you can use the funds for just about any purpose, including starting a business, paying for college, refinancing other high-interest debt, or making purchases. important.
But the interest you pay on a HELOC is not deductible under all circumstances. Using HELOC funds for anything other than buying, building, or substantially improving your home makes the interest non-deductible. This means you cannot deduct HELOC interest if you use the funds to pay for a wedding or vacation or refinance other debts.
If you’re considering a cash-out refinance instead of a HELOC, Credible allows you to compare rates in minutes.
Prior to the Tax Cuts and Jobs Act of 2017, homeowners had much more flexibility when deducting interest from a home equity loan. Before 2018, you could deduct interest on up to $1 million of interest on a first mortgage, plus up to $100,000 of home equity debt for a total cap of $1.1 million of indebtedness.
Plus, the IRS didn’t care how you used the loan funds. So you could use a home equity loan refinance credit card debt or paying for a wedding, and it was all deductible as long as you stayed under the $100,000 home equity debt limit.
Currently, HELOC interest is only deductible if you use it for improvements that add value, increase the longevity of the property, or adapt it to new uses. Here are some examples :
- Building an addition, such as a new master suite or deck
- Installation of central air conditioning
- Replacement of old windows with energy efficient windows
- Roof replacement
- Redo the work of the ducts
- Adding New Insulation to an Attic or Exterior Walls
- Install an elevator
- Renovations that knock down interior walls or widen hallways to make the home more accessible
Basic maintenance, such as painting or minor repairs, is not considered a “substantial” improvement. You therefore cannot deduct interest on a HELOC used for these expenses unless they are part of a larger renovation project.
Many lenders require a copy of your tax returns for the past year or two as part of their home equity line of credit application package. So get approved for a HELOC without a tax return can be difficult.
But it depends on the requirements of the lender and the type of income you receive. For example, if the majority of your income is reported on a W-2, the lender may approve your HELOC request with only copies of recent pay stubs and two years of W-2 forms from your employer.
However, if you are self-employed or retired, lenders may require a copy of your statement to verify your income.
Purchasing a home equity line of credit can be worth it, even if the interest is not deductible. But it depends on your situation and your needs.
For example, if you want to refinance high-interest debt, a HELOC can save you a significant amount of interest, even if you don’t get a tax benefit by deducting the interest.
Likewise, if you need to borrow money for another reason, such as refinancing home improvements, a HELOC can be much cheaper than other borrowing options, such as a personal loan or credit card. credit.
Just keep in mind that a HELOC is secured by your home. If you are behind on your payments, you could find yourself in foreclosure. So before you incur home equity debt – for any purpose, tax deductible or not – think about when you can afford to make the payments.
If you decide that a cash-out refinance is a better fit for your financial goals, you can compare mortgage refinance rates from multiple lenders in minutes with Credible.