Are Home Equity Loans Tax-Deductible?
Updated
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You have several options for borrowing money, like personal loans or credit cards. But those can be hard to qualify for or come with high-interest rates. Borrowing against your home’s equity is often a more affordable choice and may even offer tax benefits.
A home equity loan lets you use your home as collateral, usually with lower interest rates than personal loans or credit cards, and you might be able to deduct the interest on your taxes.
However, tax rules for home equity loans are complex and changed with the Tax Cuts and Jobs Act of 2017. Here's what you need to know.
Only the interest paid on a home equity loan qualifies for a tax deduction. You won't be allowed to deduct any money you paid toward the loan's principal.
However, you'll need to itemize your deductions instead of taking the standard deduction in order to deduct the interest.
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The rules vary based on whether you secured a home equity loan before or after the passage of the Tax Cuts and Jobs Act of 2017:
You can deduct mortgage interest, including home equity loan interest, on the first $1 million of mortgage debt. If you're married and file separate tax returns, you can only deduct interest on the first $500,000 of mortgage debt.
You can only deduct mortgage interest, including home equity loan interest, on the first $750,000 of mortgage debt. If you're married filing separately, you can only deduct interest on the first $375,000 of mortgage debt.
The Tax Cuts and Jobs Act, or TCJA, didn't just change how much interest you can deduct for mortgage-related debt. It also narrowed the rules for when you can deduct interest on a home equity loan or home equity line of credit (HELOC).
Before the law took effect, you could deduct home equity loan interest no matter what you used it for. If you used the funds to pay off credit card debt or medical debt, you could still deduct the interest. But TCJA suspended the deduction for home equity loans and HELOCs for tax years 2018 to 2025 unless they're used to buy, build, or substantially improve a qualifying primary or secondary home.
To deduct mortgage or home equity loan interest, you'll need to itemize your deductions at tax time. But for many taxpayers, itemizing is no longer worth it. That's because the Tax Cuts and Jobs Act nearly doubled the standard deduction, which is the fixed amount you can deduct on your taxes, even if you have no expenses.
If you don't have deductions exceeding these thresholds, you're better off taking the standard deduction, even if that means you can't deduct home equity loan interest. Nearly 90% of taxpayers now take the standard deduction instead of itemizing, according to IRS data.
The rules for deducting interest paid on a HELOC -- which is a line of credit secured by your home -- are the same as those for deducting interest on a home equity loan: The money must be used to buy, build, or substantially improve a qualifying residence in order to deduct the interest.
Whether itemizing on your tax return makes sense for you will hinge on whether your specific deductions exceed the standard deduction, which changes from year to year. If you don't pay a lot of mortgage interest, have low property taxes, and only pay a modest amount of interest on a home equity loan or HELOC, then itemizing may not make sense.
If you're not sure how your home equity loan will affect your taxes, it pays to consult an accountant or tax advisor for more information. But remember, even if you don't snag a tax break from a home equity loan, it can still be an easy, affordable way to borrow money when you need to.
Most of the time, when you take on debt, it can't be used to reduce your taxable income. But in some cases, the interest you pay on a home equity loan or HELOC can serve as a tax deduction.
If you use a home equity loan or HELOC to renovate or improve your home, the interest you pay on it is tax-deductible. But if you use that money for any other purpose, it won't serve as a tax deduction. That includes home repairs -- you can't take a deduction for home equity loan interest if you use the money you borrow to fix a cracked foundation or patch up a damaged roof.
If you take the standard deduction instead of itemizing, you won't be able to deduct home equity loan interest. In that event, a home equity loan won't affect your taxes.
Under the Tax Cuts and Jobs Act, homeowners can deduct mortgage interest on up to $750,000 worth of loans. This includes interest on a primary mortgage, a mortgage for a second home, and interest on a home equity loan or HELOC. (For those who are married filing separately, that threshold is reduced to $375,000.) As such, if you already have a $750,000 mortgage, you won't be eligible to deduct home equity loan interest. Otherwise, you can deduct interest on a home equity loan that's secured by either your primary or secondary home.
Tax deductions serve the important purpose of lowering your adjusted gross income. Say you're able to claim a $10,000 deduction on your tax return. That's $10,000 worth of earnings the IRS won't impose taxes on. The result? Added tax savings for you.
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