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If youre interested in consolidating credit card debt, for example, and if you can get a much lower rate with a HELOC, then you could save money this way. Of course, this strategy assumes that youll pay the HELOC down as quickly as possible to minimize interest charges and that you wont run up new debt on the cards that youve paid off. So, you could use a home equity loan to refinance credit card debt or pay for a wedding, and it was all deductible as long as you stayed under the $100,000 home equity debt cap. Itemizing deductions allows some taxpayers to reduce their taxable income, and thus their taxes, by more than if they used the standard deduction. Using a HELOC to invest in home improvements to your primary residence could be a smart choice if those improvements increase the home’s value and you can deduct the interest payments.
This can include major repairs and renovations, such as replacing the roof, carpeting, or components, such as the furnace, central air conditioner or hot water heater. The costs of refinancing into a single, first mortgage will likely kill most of the tax savings for many homeowners. You’ll also want to check the math as interest rates are creeping up. Even a small increase on your large principal mortgage rate could also reduce or eliminate the tax savings from deducting interest on the HELOC portion of your debt.
When you can’t claim interest on a HELOC
But if you use the money to pay off credit card debt or student loans — or take a vacation — the interest is no longer deductible. This means that for those filers not already itemizing, unless they have a particularly high interest rate and loan balances, taking the standard deduction may result in the highest refund. For those already itemizing for other reasons, adding on home equity tax deductions can reduce their tax bill.
To deduct home interest, you will need to file Form 1040 or 1040-SR , and itemize deductions on Schedule A . If you are single, it may not make sense to itemize to deduct the HELOC interest you paid, because the $12,000 in interest you paid is only slightly lower than the standard deduction of $12,550 for singles. We always recommend speaking with your tax preparer or a tax professional regarding your unique circumstance in order to accurately determine whether you qualify for this and other tax benefits. A HELOC can provide greater flexibility in regard to either purchasing or improving your home. But if you’re going to use it for unrelated purposes, make sure you’re fully familiar with the tax benefits of doing so. For example, let’s pretend that you owe a total of $100,000 but just $60,000 was used to for home improvement.
Refinancing Or A Home Equity Loan: Which Is Right For You
You can only deduct interest on up to $750,000 in mortgage debt, including your first mortgage and any home equity loans or lines of credit. The limit is half that ($375,000) for married couples filing separate returns. After the 2017 tax year, interest on home equity debt for purposes other than the "buy, build, or substantially improve" standard is no longer be deductible.
In this case, it may be better to use a home equity loan even if the interest is not tax deductible. Basically, if youre using the money received to build out or improve the property, the interest you pay on the equity loan should be tax-deductible. Likewise, if you need to borrow money for another reason, such as refinancing home renovations, a HELOC may be much less expensive than other borrowing options, such as a personal loan or credit card. IRS Publication 936 addresses the topic of the tax deductibility of a home equity loan and a home equity line of credit with tables and examples that could apply to your personal situation. It also defines what qualifies as a "substantial" home improvement, and more.
Member Benefits
If you took out a HELOC loan, TurboTax will ask you simple questions about your loan and give you the tax deduction you are eligible for. In all of the above cases, the interest that you pay on the HELOC will be fully tax-deductible. Limitations apply when money is borrowed that is not used in connection with either purchasing or improving the home.
If you're looking to deduct home equity interest from a "substantial" home improvement, you'll want to keep good records of the outlays in case of a future audit. Note that $750,000 is the total new limit for deductions on all residential debt. If you have a mortgage and home equity debt, what you owe on the mortgage will also come under the $750,000 limit—if it’s a new mortgage. Older mortgages may be covered under the previous $1 million limit (or $500,000 for a married taxpayer filing a separate return).
If you arent sure whether to itemize or take the standard deduction, contact a tax professional for guidance. Before the Tax Cuts and Jobs Act of 2017, homeowners had a lot more flexibility when deducting interest from a home equity loan. Prior to 2018, you could deduct interest on up to $1 million in interest on a first mortgage, plus up to $100,000 of home equity debt for a total cap of $1.1 million of indebtedness. But the interest you pay on a HELOC isn’t deductible in all circumstances.
Interest from home equity loans is unfortunately no longer deductible in 2018. These individuals, most likely homeowners in high-tax states, will need to plan accordingly. There are quite a few cases where the interest on a HELOC can be deductible but there are also many times the interest will not be deductible. To add to the confusion, there will also likely be cases when only a certain portion of the home equity loan is deductible. Learn the ins and outs of deducting noncash charitable contributions on your taxes with the experts at H& R Block.
The tax benefits of home equity lines of credit, or HELOCs, are very similar to that of first mortgages. Yet there are differences in regard to the use of the proceeds that come from a HELOC. It’s important to know those differences if you’re considering taking a HELOC, particularly one that you get after you have purchased your home. If you are on the fence about a property remodel, then borrowing against your home just to take advantage of deducting the interest is probably not your best choice.
Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments. She most recently worked at Duke University and is the owner of Peggy James, CPA, PLLC, serving small businesses, nonprofits, solopreneurs, freelancers, and individuals. You are leaving AARP.org and going to the website of our trusted provider. If you own your home, you probably have noticed that real estate prices have climbed significantly in the last year. For some homeowners, they may be enjoying 25% or more of home price increases since the pandemic started. Here’s how that works with a home valued at $400,000 with a loan balance of $300,000.
But if you have a mortgage balance of $500,000, you’d be able to deduct the interest from any HELOCs you take out up to a limit of $250,000. The odds of being audited by the Internal Revenue Service are generally low, but you do not want to take any chances. If you plan to use a home equity loan or a HELOC to pay for home repairs or upgrades, be sure to keep receipts for everything that you spend and bank statements showing where the money went. If you used a home equity loan to cover improvements to your home, your mortgage is considered a mixed-use mortgage by the IRS. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout lifes financial journey.
Changes to the Home Equity Loans deduction is more likely to hit the average American family. As of writing this post, the median price of a home in the U.S. is $207,000 according to Zillow. With the new GOP Tax Plan now in effect for 2018 many people are wondering, “Can I still deduct my home equity line of credit? ” Or just “How do I know if I can deduct the Home Equity Line of Credit interest? The interest on home equity loans cannot be deducted for tax purposes if the proceeds were not used to buy, build or substantially improve your home. If you hire a tax preparer, inform the preparer about any possible deductions or tax credits you should qualify for and provide them with the documentation.
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