Are Home Equity Loans Tax Deductible?

You pay interest on your first mortgage and home equity loan, but are home equity loans tax deductible?

Confusion on this topic persists because the IRS changed the guidelines in 2018, limiting who can write off their home equity loan interest, as well as what types of home equity loan interest can be written off on income taxes.

Keep reading to learn who can deduct mortgage interest and how they qualify.

Is Home Equity Loan Interest Tax Deductible?

Depending on how much mortgage debt you have and when you took out the loan, the interest on your home equity loan could be tax-deductible. According to IRS rules, to claim the tax deduction, you’ll need to have used the equity to buy, build onto or substantially improve your primary residence or second home.

Rules For Deducting Interest On A Home Equity Loan Or A Home Equity Line Of Credit (HELOC)

The rules for claiming mortgage interest as a tax deduction are the same for first and second mortgages. This includes home equity loans or home equity lines of credit (HELOCs). It also includes refinance loans.

The rules for deducting interest on a home equity loan or HELOC changed when the Tax Cuts and Jobs Act (TCJA) was passed.

Here’s how the TCJA affects whether you can deduct your home equity loan interest.

The TCJA also lowered the total mortgage loan amounts that you can deduct interest on. These total loan amounts include home equity loan debt. The total amount dropped from $1 million to $750,000 for married couples filing jointly and single filers. For those who are married filing separately, it dropped from $500,00 to $375,000. It’s important to note that you can still deduct some interest on loans greater than $750,000, but the loan amount used to calculate the interest will be capped at $750,000.

If you had a purchase contract before December 15, 2017 for a loan that closed before January 1, 2018, you qualify under the old $1 million limits.

TCJA Rules Example

Here’s a quick example of how this works.

Let’s say you borrowed $300,000 to buy a house in 2020. Then a year later, you took out a $50,000 home equity loan to build an addition onto your house. Since this home equity loan was used to improve your home and your loan total falls under the TCJA limits of $750,000, the entirety of interest paid on these loans would be tax deductible.

How To Deduct Home Equity Loan Interest

Knowing how to deduct home equity loan interest is important as a homeowner. The key is to have proper documentation and to understand the IRS rules.

1. Make Sure Your Interest Qualifies

Before you deduct home equity loan interest, you must ensure your loans qualify. Here’s what to consider.

• The mortgage debt doesn’t exceed the limits. As long as the loan was opened after 2018 and before 2025, if any loans you have on a property exceed $750,000, you can only deduct interest on the first $750,000. This includes the first mortgage you used to buy the home and any second mortgages you borrowed, whether a HELOC or home equity loan. Determine when you borrowed the funds and correlate them with the limits of $750,000 after 2018 or $1 million before 2018.
• A “qualifying residence” secures the home equity loan. For your loans to count, they must be on a qualifying residence, such as your primary residence (where you live), or a second home, such as a vacation home. However, the home you used the funds to buy, build or improve must be the collateral for the loan.
• The debt isn’t higher than the qualifying home(s) value. If you owe more than the cost of the home plus any substantial improvements, you’re upside down on your home. The IRS won’t allow you to deduct interest on any loans that exceed the value of the collateral.
• The funds were used to buy, build or improve a qualifying home(s). To qualify for the mortgage interest rate deduction, you must use the funds to buy a property, build your own home or renovate your existing home. A few examples of substantial home improvements include replacing the roof, adding a room addition or remodeling the kitchen.

2. Collect Your Mortgage Statements And Other Documents

You must prove how you used the funds to claim the interest deduction. You’ll first need your mortgage statements to prove how much you borrowed.

Next, you must have receipts, contracts and any other documentation proving how you used the funds. For example, did you buy your house with them? Finally, show your Closing Disclosure and mortgage deed, and you can prove how you used the funds.

If you used the funds to renovate your home, you’d need all receipts for materials, labor and any other costs incurred to renovate the property.

3. Itemize And Calculate Your Deductions

To determine your deductions, you should add up the total payments allowed for tax deductions. Mortgage interest is one example, but you may also write off your property taxes and mortgage points if they are on your primary residence.

4. Factor In Your Mortgage Points

If you borrowed the mortgage this tax year, you could also deduct the mortgage points as a part of your itemized deductions. Mortgage points are money you pay to buy down your interest rate or as a fee the lender charges for underwriting your loan. Because mortgage points are prepaid mortgage interest, you can deduct them from your taxes if the loan is for your main home, and if it’s normal business practice in your area to pay mortgage points.

Whether you pay the points in cash at closing or roll them into your loan will affect how much of the points you can write off in a tax year. Check with your mortgage originator and/or tax advisor to verify your situation.

5. Choose Between A Standard Or Itemized Deduction

To take the mortgage interest deduction, you must itemize your deductions. But it doesn’t always make sense to do so.

Before you do too much legwork, determine the estimated amount of your interest payments using the 1098 from your mortgage lender. If you don’t have many other deductions to add to the interest deduction, and it isn’t close to $14,600 for single filers or $29,200 for those married filing jointly, you’re better off taking the standard deduction because you’ll save more money on your taxes.

FAQs For Deducting Interest On Home Equity Loans

Let’s answer some common questions about deducting interest on home equity loans.

Can I deduct interest on a home equity loan in 2024?

According to the Tax Cuts and Jobs Act, home equity loan interest is tax deductible through 2026. This means you can deduct your home equity loan interest if it meets the IRS guidelines regarding home acquisition debt and you itemize your deductions.

What forms will I need to deduct my home equity loan interest?

To deduct your home equity loan interest, you’ll need the 1098 forms from your mortgage lender and itemized receipts to prove how you used the funds.

Is HELOC interest tax deductible?

HELOC interest can be tax deductible if it meets the IRS guidelines. The rules are the same for a home equity loan and a HELOC. This means the loans must not exceed the stated loan limits, and you must prove you used the funds to buy, build or improve a home.

The Bottom Line

Borrowers can deduct their home equity loan interest if they use the funds on the home that serves as collateral. So, whether you borrow a home equity loan to help you buy or build a home, or borrow it after you own the home to make improvements, you may deduct the interest.

If you’re interested in seeing how much you can borrow with a home equity loan, start an application with Rocket Mortgage^® today to see if you qualify.