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Is HELOC Interest Tax Deductible?
A home equity line of credit (HELOC) can be a great way to fund home renovations or consolidate debt at a lower interest rate. But did you know that you might be able to deduct the interest you pay on a HELOC from your federal income taxes? Here’s what you need to know about the rules for deducting HELOC interest and how to do it.
Rules for Deducting HELOC Interest
The IRS allows you to deduct the interest on home equity loans and HELOCs if you use the funds to “buy, build, or substantially improve your home.” This means that if you use your HELOC to remodel your kitchen or build an addition, the interest may be deductible. However, if you use the funds to consolidate debt or cover personal expenses, the interest is not deductible.
To deduct your HELOC interest, you must itemize your taxes instead of taking the standard deduction.
IRS Rules and Limits for HELOC Interest Tax Deduction
| Date HELOC Taken Out | Loan Debt Limit (Married Filing Jointly) | Loan Debt Limit (Married Filing Separately) | Conditions for Interest Deductibility |
|---|---|---|---|
| December 15, 2017 and earlier | $1 million | $500,000 | Any purpose (until 2025), regardless of use; HELOC must be for primary or secondary home |
| After December 15, 2017 | $750,000 | $375,000 | Deductible only if used to buy, build, or substantially improve the primary or secondary home |
What You’ll Need to Claim the HELOC Interest Tax Deduction
To claim HELOC interest on your income taxes, gather the following documents:
- Mortgage interest statement (Form 1098): Your HELOC lender should provide this form, showing how much interest you paid during the year.
- Schedule A (Form 1040): Use this form to itemize the mortgage interest deduction on your tax return.
- Proof of eligible expenses: Collect receipts and invoices that prove you used HELOC funds to buy, build, or improve the home that secured the HELOC.
Consult with a tax professional to ensure you have the most up-to-date information and necessary documents.
How to Deduct HELOC Interest on Taxes
- Make Sure Itemizing Is Worth It: Add up all your eligible deductions for the year and compare them to the standard deduction. If your itemized deductions are higher, proceed with itemizing.
- Gather Your Supporting Documents: Collect necessary documents like Form 1098, Form 1040, receipts, and bank statements.
- Itemize Your Total Deductions: Enter the total amount of your deductions, including HELOC interest, on line 8a of Schedule A (Form 1040).
More Tax Breaks for Homeowners
In addition to deducting mortgage interest, homeowners may also be eligible for other tax breaks, such as:
- Property taxes: State and local property taxes may be itemized as a deduction on Schedule A of Form 1040.
- Discount points: If you purchased points to reduce your interest rate, you can deduct them in the year you took out your mortgage.
- Mortgage tax credit: The IRS offers a mortgage credit certificate program to help lower-income individuals afford homeownership.
The Bottom Line
HELOCs offer many benefits, including lower interest rates and potential tax deductions if used for substantial home improvements. If you itemize your deductions, this benefit could help you save money on your income taxes.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your mortgage options and find the best solution for your needs.
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