Is interest paid on a home equity loan tax deductible?

If a good part of your net worth is tied up in real estate, it can be difficult to access money in a pinch. If you need money, a home equity loan can give you access to money so you don’t need expensive credit card debt or personal loans.

Another advantage of home equity loans is the potential to write off the interest paid to lower your tax bill. That said, you must meet a few rules and requirements to be eligible for this tax deduction.

Dig deeper: What is a home loan? A complete overview

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So can you deduct the interest paid on your home equity loan (HEL) when you do your taxes? It depends on how the money is used. According to the IRS, home equity loan interest can be tax deductible as long as you use the funds to “buy, build or substantially improve” your home. However, you do not qualify for a tax deduction if you use the loan funds. for other purposes, such as paying off your student loans or medical debt.

Eligibility is not only about how taxpayers use the funds – it also depends on when you took out the loan and the total amount of your home debt. Continue reading for more information on the rules for deducting interest on home loans.

Learn more: Tax Deduction vs. Tax Credit – What’s the Difference?

The rules for home equity loan interest tax deductions changed after the Tax Cuts and Jobs Act (TCJA) took effect in late 2017. Here are the rules current under this act.

• For HELs taken after December 15, 2017: You are allowed to deduct the interest paid on up to $750,000 of home loans. If you are married and filing separately, the limit drops to $375,000. Remember that this cap applies to the total of all residential debt, including your first mortgage, home equity loans, and home equity lines of credit (HELOCs). Again, you can only deduct the interest on your HEL or HELOC if you used the money to “buy, build or substantially improve” the property.

• For HELs taken on or before December 15, 2017: You can claim tax deductions on interest paid on up to $1 million of qualified residential debt, regardless of how you use the funds. If you are married and filing separately, the limit is $500,000.

Note that your home equity loan, whether issued before or after TCJA took effect, must be secured by your first or second home to be eligible for interest tax deductions.

The Tax Cuts and Jobs Act may affect your tax deduction if you take out mortgage debt after December 15, 2017.

Let’s say you bought a home in 2021 and currently have a mortgage balance of $720,000. Then, you took out a $75,000 home equity loan in 2023 to make significant home improvements. Since your total combined mortgage balance ($795,000) exceeds the $750,000 limit set by the TCJA, you cannot claim all of the interest paid on your home loans. However, you can deduct the interest paid on the first $750,000.

It is important to note that these rules established by the TCJA will expire on December 31, 2025. In other words, if Congress does not pass new legislation, the interest deduction limits may return to pre-TCJA levels in 2026.

Dig deeper: Mortgage interest tax deduction – How it works and when it makes sense

Here’s how to claim the home equity loan interest tax deduction and lower your Uncle Sam tax bill.

Not all homeowners with a home equity loan are eligible to write off the interest they have paid. The total amount of your mortgage debt, when you took out the home equity loan, and what you use the funds for all can affect your eligibility. To avoid any problems come tax season, review the TCJA rules above to see if your loan qualifies for a deduction. Contact a tax professional if you have any questions or concerns.

You need your deductions to qualify for a home equity loan interest tax deduction instead of opting for the standard tax deduction.

The standard deduction for tax year 2024 (filed in 2025) is:

• Single applicants and married couples submit separately: $14,600

• Heads of household: $21,900

• Married couples filing jointly: $29,200

Itemizing doesn’t always make financial sense, especially if the total of your itemized deductions is lower than the standard deduction for your filing status. However, if your itemized deductions are significantly above your standard deduction amount, it might be worth your while to claim the home equity loan interest tax deduction.

Read more: How to decide between a standard and itemized tax deduction

Collect documents and receipts

Before you file an itemized return to claim the home equity loan interest tax deduction, make sure you have these documents handy:

• IRS Forms 1098: : This form details the mortgage interest you paid during the tax year. You should receive this form from your lender before tax season if you have paid mortgage interest of $600 or more.

• IRS Form 1040: : Use this form to itemize your deductions. By submitting this document to the IRS, you have waived the standard deduction.

• Relevant receipts or bank statements: Have your receipts and bank statements to see how you used the funds from the home loan. You must use the money to build, buy or make significant upgrades to your home to qualify for the deduction.

To report a home equity loan on your taxes, you’ll need IRS Form 1098 (Mortgage Interest Statement), which you’ll receive from your lender before it’s time to file your taxes. The form shows the interest you paid on your primary mortgage loan, home equity loan, home equity line of credit, and any other residential debt during the year past You can itemize your deductions using IRS Form 1040.

A home equity loan can lower your tax bill, as the interest you pay on it can be tax deductible. For home equity loans taken out after December 15, 2017, and before 2026, the IRS allows you to write off interest paid on up to $750,000 of qualified loans, or $375,000 if and you are married and filing separately – but there are rules about how. spend the funds. For qualified loans taken out on or before December 15, 2017, you can deduct the interest paid on a combined qualified mortgage debt balance of $1 million, or $500,000 if you’re married and filing separately.

Yes, the interest paid on your second mortgage may qualify for a tax deduction. Home equity loans and home equity lines of credit are two types of second mortgages. If you have tax deductions, you can write off the interest of the second mortgage, as long as you use the funds to build or buy a house or to make major home improvements.

This article was edited by Laura Grace Tarpley.