If you’re on the fence about a home remodel, you’ll be happy to know that you can still deduct the interest you pay on home equity loans that are used to pay for certain home improvements. In the past, borrowers were allowed to deduct interest paid up to $100,000 for home equity loans and HELOCs, regardless of how they used the money. That changed with the 2017 Tax Cuts and Jobs Act.
While many tax breaks were introduced in that bill, the deductibility of non-home improvement related interest was eliminated. The change was confusing to many taxpayers. In an effort to eliminate some of the confusion, the IRS issued an advisory regarding home equity loans. In it, the IRS stated that the interest on home equity loans, HELOCs and second mortgages is still tax-deductible, regardless of how the loan is labeled, if the funds are used to buy, build or substantially improve the taxpayer’s home that secures the loan. That’s good news for homeowners looking for a low-interest way to renovate a home.
When is home equity loan interest tax-deductible
If you are improving your property, chances are the interest will be tax-deductible, but check with your accountant to be sure. The improvements need to be made on the property on which you are taking out the home equity loan. In other words, you can’t take out a home equity loan on your primary residence to remodel your beach house. Well, actually you can. You just can’t deduct the interest. Here are some examples of home improvement projects that would qualify for the interest tax deduction.
- Installing a new roof on a home
- Building a new porch, deck or patio
- Installing an in-ground swimming pool
- Replacing your windows
- Renovating a kitchen or a bathroom
- Building an addition to expand a home
- Replacing the HVAC system
- Paving the driveway
- Completely rewiring the home
- Adding new siding
This gives you a general idea of all of those home improvement projects that are still tax-deductible. So what type of expenses are not tax-deductible. Personal expenses, paying off credit card bills and other debt, educational expenses, vacations, purchasing a car or home furnishings, are examples of expenses that are not tax-deductible. All things to keep in mind when deciding on the best type of loan when borrowing.
Keep records if deducting interest on home equity loans
If your home improvement project fits the scope of acceptable IRS deduction, then be sure to keep accurate records of all of your expenses. You’ll want to show how your home equity funds were spent. At the beginning of the year, you should receive an IRS Form 1098. This is a Mortgage Interest Statement from your lender or lenders. It will show the interest you paid on your mortgage, as well as the interest you paid on a home equity loan or HELOC. If you have loans with different lenders, you will receive forms from each.
You need to itemize your deductions when filing your tax return to take advantage of deducting the interest on home equity loans. If the total of the deductions you are eligible to claim does not exceed the standard deduction, you may be better off not itemizing. It’s also important to remember that home equity loan interest deduction is not unlimited. Homeowners are allowed to deduct the interest paid on as much as $750,000 of qualified personal residence debt on a first and/or second home. This includes home equity loans. Check with your accountant to see how much can be deducted in your case. It may also be helpful to read through IRS Publication 936 Home Mortgage Interest Deduction or more details.
Applying for home equity loans
While deducting home equity loan interest can be a great perk, a home equity loan may still be a good option even if your use is not tax-deductible. It can be a low-interest way to pay down debt or help with educational costs. Using the equity in your home makes it a bit easier to finance larger expenses at a more competitive rate. Learn more about home equity loans by reading Benchmark Federal Credit Union’s Home Equity Loans vs HELOCs blog. View our home equity loan rates.