Are Home Equity Loans Tax-Deductible?
If you're thinking about taking out a home equity loan, it's natural to wonder if the interest you pay on the loan will be tax deductible. The answer to that question isn't a clear "yes" or "no," as the way you use the proceeds from the loan impacts whether or not you can write the interest off as a tax deduction.
Prior to 2017, the interest on home equity loans was tax-deductible regardless of how you used the funds, but that changed when the Tax Cuts and Jobs Act became law in December 2017. The TCJA specifies interest on all mortgage loans, including home equity loans, is deductible only to the extent that the funds are used to purchase, fund construction of, or make substantial improvements to the property used to secure the loan.
It's important to note that the improvements must be made to the property that's used to secure the home equity loan in order for the interest to be tax-deductible. For example, if you took out a home equity loan on your primary residence and used it to improve a vacation property, you wouldn't be able to deduct the interest from your taxes.
Determining if home equity interest is tax-deductible
If you were buying a home or building a new home, you'd take out a mortgage or construction loan rather than a home equity loan. To take out a home equity loan, you must already own your home and have significant equity built up in the property. You can use the proceeds of a home equity loan for any purpose, but the interest will only be tax-deductible if you use the loan to improve the property substantially. Examples of substantial improvements include:
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Home improvements that add value to the property, such as a kitchen remodel or adding a bathroom or garage
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Home repairs or upgrades that extend the useful life of the property, such as roof replacement or foundation repair
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Changes that adapt the property for new use, such as converting an unfinished basement into a finished living space
If you plan to write off the interest on a home equity loan, then you'll need to keep detailed records demonstrating how the funds were used.
To deduct the interest, you'll need to itemize
Even if you do use the funds from a home equity loan to improve your home substantially, the way you file your taxes will also impact whether or not you'll be able to deduct the interest you pay from your taxable income. That's because you can only deduct interest payments on a home equity loan (or any kind of mortgage) if you itemize deductions on your income tax return.
It only makes sense to itemize deductions if you have deductible expenses that exceed the standard deduction, which is $29,200 for married couples filing jointly and $14,600 for people who are single and married couples who file separately, as of 2024. Because of this, the vast majority of American taxpayers don't itemize their taxes. Unless you have a lot of other things to deduct, chances are you probably won't write off the interest from a home equity loan even if you use the loan proceeds in a tax-deductible manner.