Complete Guide: Home Equity Loans And Tax Deductions Bankrate
Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Main Menu Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Main Menu Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Main Menu Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure Are home equity loans tax-deductible
Thomas Barwick/Getty Images Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Written by Contributing writer Kim Porter is a former contributor to Bankrate, a personal finance expert who loves talking budgets, credit cards and student loans. Porter writes for publications such as U.S. Aug. 18, 2022 Edited by Mortgage editor Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Reviewed by Senior wealth manager, LourdMurray Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated Aug. 18, 2022 Share
Bankrate Logo Why you can trust Bankrate
While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation of how we make money. Bankrate Logo Why you can trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate Logo Editorial Integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate Logo How We Make Money
You have money questions. Bankrate has answers. 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 life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Bankrate Logo Insurance Disclosure
Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in . Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way. A is one way to access the equity in your home for a variety of different purposes. In addition to using the money for home improvement projects, many borrowers use home equity loans to finance debt consolidation or other large purchases like investments or higher education. While the interest paid on home equity loans can be , there are some limitations. Lightbulb Key takeaways Joint filers who took out a home equity loan after Dec. 15, 2017, can deduct interest on up to $750,000 worth of qualified loans, while single filers can deduct interest on up to $375,000. The loan proceeds, however, must be used to "buy, build or substantially improve" the home that was used to secure the loan. Substantial improvements are those that add value to the home, prolong its useful life or adapt a home to new use. To take advantage of this tax break, you'll need to itemize your deductions at tax time. Is home equity loan interest tax-deductible
Filing jointly Home equity loan closed after Dec. 15, 2017 Can deduct interest on up to $750,000 of debt Filing jointly Home equity loan closed prior to Dec. 15, 2017 Can deduct interest on up to $1 million of debt Filing separately Home equity loan closed after Dec. 15, 2017 Can deduct interest on up to $375,000 of debt Filing separately Home equity loan closed prior to Dec. 15, 2017 Can deduct interest on up to $500,000 of debt Whether or not you can deduct the interest paid on your depends on when you took out your loan, how much you borrowed, what you used the funds for and whether it makes more sense to itemize or take the standard deduction. With the passage of the Tax Cuts and Jobs Act of 2017, joint filers who took out their home equity loan after Dec. 15, 2017, can deduct interest on up to $750,000 worth of qualified loans, while separate filers can deduct the interest on up to $375,000. However, the funds from the loan must be used to "buy, build or substantially improve" the home that was used to secure the loan. This means that you can no longer deduct the interest on home equity loans that you use to pay off debt or put toward an emergency expense. Those limits also include any mortgage loans currently outstanding. For example, if you still have a mortgage balance of $500,000, only $250,000 of home equity loans will be eligible for tax deductions. If you took out your home equity loan prior to Dec. 15, 2017, your limits are higher, at $1 million for joint filers and $500,000 for separate filers, as long as the funds were used to buy, build or improve the home. Let's say you took out a home equity loan in 2022 of $200,000. Half of that loan went toward credit card debt consolidation, while the other half went toward the construction of a new home office. In this scenario, any interest you paid on the $100,000 used for your home renovation would be tax-deductible, but the interest you paid on the $100,000 used for debt consolidation would not be. How to claim home equity loan interest deduction
1 Know where you stand with both mortgages
The loan you first took out to buy the home is your first mortgage, and the home equity loan is your . Both mortgages must fit IRS requirements. Combined, the debt must: Not exceed $750,000 or $1 million, depending on when the loans were taken out Be secured by a "qualified residence," which can be your main home or second home Not exceed the value of the residence(s) Be used to acquire or substantially improve the residence(s) You can find the dollar amounts of your mortgage and home equity loan on your most recent billing statements or by calling your loan servicer. Next, confirm whether the home equity loan was used to buy, build or improve your home. Here's a rule of thumb: A "substantial" improvement is one that , prolongs its useful life or adapts a home to new use. While the IRS doesn't offer a full catalog of expenses that fit this description, here are a few examples: Building an addition to the home Installing a new roof Replacing an HVAC system Completing an extensive kitchen remodeling project Resurfacing the driveway 2 Gather your documents
To deduct home equity loan interest on your tax return, gather the following documents: Mortgage interest statement (Form 1098) – This form is provided by your and shows the total amount of interest paid during the previous tax year. Statement for additional interest paid, if applicable – If you paid more home equity loan interest than what's shown on your Form 1098, you'll need to attach a statement to your tax return with the additional amount of interest paid and an explanation of the discrepancy. Proof of how home equity funds were used – Keep receipts and invoices for any expenses that significantly improve the value, longevity or adaptability of your home. This includes costs for materials, labor and permits needed for the improvement. 3 Itemize your deductions
To take advantage of this tax break, you'll need to at tax time. That's only worth doing if all of your deductions add up to more than the amount of the for the 2021 or 2022 tax years: Married filing jointly Filing separately/single Head of household 2021 $25,100 $12,550 $18,800 2022 $25,900 $12,950 $19,400 You can either take the standard deduction or itemize - not both. After totaling your itemized expenses, including your home equity loan interest, and comparing them to your standard deduction, you have to decide whether itemizing is to your advantage. For instance, say you paid $2,600 in interest on a home equity loan and $9,100 in interest on your mortgage in 2021. You're filing a joint return, and these are the only deductions you can itemize for a combined value of $11,700. Because $11,700 is far lower than the standard deduction of $25,100, it doesn't make sense to itemize just so you can deduct the interest you paid. However, it's always wise to speak to a tax professional to explore your options before proceeding. If you do end up taking the home equity loan interest deduction, it would be claimed on IRS tax form . Bottom line
The interest on a home equity loan is tax-deductible provided the funds were used to buy or build a home, or make improvements to one, as defined by the IRS. However, if the combined interest on your first mortgage and home equity loan, plus any other itemized deductions such as state and local taxes, is less than the standard deduction for the tax year, it's better to take the higher standard deduction instead of itemizing. As with any tax consideration, consult with a professional when deciding how to prepare your return. Written by Kim Porter Contributing writer Edited by Mortgage editor Reviewed by Senior wealth manager, LourdMurray You may also like