Interest on Your Home Equity Loan May Be Tax Deductible — Here’s How

Some homeowners may be able to list interest paid on a home equity loan as a tax-deductible expense for this year’s taxes. Here’s how it works.

Rachel Curry - Author

Mar. 11 2022, Published 1:51 p.m. ET

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Little-known tax deductions can save Americans thousands of dollars on taxes annually. One deduction comes from interest on your home equity loan. Some mortgage borrowers who borrow from their home equity are eligible for this deduction, with the amount based on federal equity limits for joint or individual filers.

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Here are the latest rules from the IRS so you can determine whether or not you’re eligible to deduct interest on your home equity loan this tax season.

When is interest on home equity loan payments tax deductible?

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According to rules the IRS updated in 2017, taxpayers can deduct interest payments on a home equity line of credit (HELOC), also known as a home equity loan, if the money is used to “buy, build, or substantially improve” the existing home.

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This means the interest payments on the loan are only tax deductible if you’re spending money to renovate the same property serving as equity to source the loan.

In order to do this, you need to itemize the deductions instead of taking a single standard deduction. You will need to keep good records of all your expenses related to the renovation on your property and provide the IRS with that information when reporting the itemized deductions.

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There are home equity loan limits for tax-deductible interest payments.

There are loan limits for tax-deductible interest paid on home equity loans. Knowing this in advance can help homeowners decide on the size or their line of credit. However, if you’ve already borrowed the money, you still have quite a bit of wiggle room.

U.S. taxpayers are able to deduct interest paid on a home equity loan for their taxes if the loan is $750,000 or less for married couples filing jointly. For married couples filing separate returns, the loan limit is $375,000.

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There's a caveat for home equity loans on older mortgages.

If you took out the mortgage on your home prior to 2018, the loan limit for tax-deduction eligibility is higher. Married couples filing jointly can deduct taxes for interest paid on loans up to $1 million. For married couples filing separately, the loan limit is $500,000.

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Should you deduct home equity loan interest on your taxes?

Speak with an accountant to determine if the tax deduction benefit would be beneficial enough for your finances. You’ll have to take into consideration the interest rate on your home equity loan, the size of the loan, and the total cost of interest payments versus maximum tax deductions.

A reduced tax burden can make a world of difference for American families. However, since the IRS increased the standard deduction to $12,950 for single filers and $25,900 for married couples filing jointly, it may not make sense to itemize deductions like interest on a HELOC. If the loan is large enough. and the variable interest rate of your home equity loan high enough, an accountant may just recommend it.


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