Is HELOC Interest Tax Deductible?

Is HELOC Interest Tax Deductible?

A home equity loan could be an opportunity for you to borrow funds based on the increased value of your home. Some lenders provide a line of credit rather than a one-time disbursed payment, allowing you to use those funds for multiple things. Here’s what you need to know about these lines of credit and how they impact your taxes.

When it comes to completing your taxes, be sure to consider whether you qualify for a HELOC tax deduction to lower your liability.

What Is a HELOC Home Equity Line of Credit?

A home equity line of credit (HELOC) is a type of loan you take out on your home’s equity or the unmortgaged amount of value on the property. For example, if your home is worth $200,000 and you owe $120,000 on your mortgage, you have up to $80,000 of equity.

Some lenders will offer a line of credit for this, which means you can borrow from it, make payments on it, and borrow again over a set number of years. HELOC loans typically have a lower interest rate than most credit card offers.

Which Home Equity Loans Qualify for HELOC Tax Deductions?

You may be able to deduct the interest from your HELOC on your taxes. This depends on how you used the line of credit with your home, including whether you buy, build, or renovate.

Interest on your HELOC may be tax deductible if you can show you used the funds to make changes to your home, which includes buying, building, or substantially improving the property. If you meet these requirements, then you could deduct the interest paid on up to $750,000 of that loan in some situations.

Does the IRS Have a List of Allowable Expenses for HELOC Interest Tax Deduction?

There are limitations on when a homeowner can claim a HELOC tax deduction.

You can only deduct the interest on these loans if:

  • The line of credit was for a qualified home, which could include either your primary home or a secondary home you own.
  • The home equity funds were used to purchase, construct, or remodel/renovate your home.

You cannot use HELOC for other purposes, such as paying off credit card debt or taking vacations. If you used the funds in those ways, or others, you cannot qualify for HELOC tax deductions.

How Do You Claim a Tax Deduction for HELOC Interest on Your Tax Return?

To claim a HELOC interest tax deduction, you report it on your tax return as an itemized deduction. To do this, you will need the IRS Form 1098 that your lender provides to you each year. Your 1098 provides specific information on the amount of interest you paid on the loan for the tax year. You will need this to report HELOC interest.

If your loan qualifies for a HELOC tax deduction, you can then determine if it increases your itemized deductions above the standard deduction. If so, you will then be able to apply that tax deduction to your taxes with the potential of lowering what you owe for that year.

Be sure you keep a record of your expenses. Document exactly how you spent HELOC funds when you received them. Then, be sure to keep all documents from your lender showing the amount of interest you paid on the home equity line of credit for the tax year.

Is There a Maximum Home Equity Loan Amount for HELOC Tax Deductions?

If you obtained a HELOC after December 16, 2017, you are able to claim the interest you paid on up to $750,000 of your HELOC loan amount. This applies to most filing statuses, with the exception of those who are married and filing separately. In that situation, the maximum amount you can claim is interest paid on up to $375,000 of your HELOC amount. Simply apply this tax deduction to your taxes for the year you paid it.

Remember, this is only for the interest you paid on that loan for the tax year you’re filing.

For those who obtained a HELOC prior to December 16, 2017, you are able to claim interest paid on as much as $1 million of your HELOC, though this is reduced to $500,000 if you are married and filing separately. If you obtained a HELOC prior to that date but have since refinanced it, you may still qualify for the higher limit.

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