Are home equity loans tax deductible?

Home. It’s where you make memories, entertain friends and family, and feel safe. Upgrades and renovations can improve the look, feel, and functionality of your home. One way to finance these upgrades is by using a home equity loan. If you do, you might also get a tax benefit.

It's a great feeling to invest in your home and make it a place that truly reflects your personal style and taste. It’s an even better feeling when you know you’ve tackled the financial challenge in a smart way.

Home equity loan interest might be tax deductible

The interest you pay on mortgage debt can be deducted from your federal income taxes under certain conditions. Home equity loans and home equity lines of credit (HELOCs) count as mortgage debt.

Here’s what to know.

First, a deduction is a way to lower your taxable income. If you earn $10,000 and you have a $1,000 deduction, you only have to pay taxes on $9,000.

This particular deduction is for the interest you paid on your mortgage loan in that tax year. The lender will send you an annual statement that gives you the exact dollar figure. 

There are a few rules:

• You itemize your deductions. 

• The money you borrowed was used to buy, build, or substantially improve the home that you borrowed against.

• The interest was paid on no more than $750,000 of mortgage debt ($375,000 for single tax filers). This includes your home equity loan or HELOC and your first mortgage if you have one. If your total mortgage debt is more than $750,000, you can still deduct the interest you paid on the first $750,000.

How is a home equity loan similar to a mortgage?

A home equity loan and your mortgage, if you have one, are both loans against your home. Both let you deduct loan interest from your federal taxes under the conditions described above. 

They are similar in a few other ways, too. For both loans:

• You can get a fixed interest rate, and equal payments over the life of the loan

• A professional appraisal is required to determine the current market value of the home

• Homeowners insurance is required

• Your debt-to-income (DTI) ratio will need to meet the lender’s requirements

In case it’s been a while since you got a mortgage, your DTI is the percentage of your income that goes toward debt payments, including your housing expenses. In general, lenders want you to have a DTI of 43% or less.

How is a home equity loan different from a mortgage?

Mortgage interest is always a potential tax deduction because a mortgage is always used to purchase the home that you borrowed for. In contrast, since home equity loans can be used in many other ways, the interest doesn’t always qualify for the tax deduction. 

For this reason, if you’re considering a remodel or home maintenance, borrowing against your home could save you money compared with taking a personal loan, which isn’t tax deductible at all.  

Home repair expenses can now seem a little easier to bear, so you may want to go ahead and get a quote for redoing your bathroom or adding a deck in the backyard.

To deduct home equity loan interest, you have to itemize

You can get the tax deductions for home equity loan interest only if you itemize your tax deductions on Form 1040, Schedule A. Filling out the form isn't difficult. But you might want to talk to a tax professional or use tax preparation software to walk you through it so that you don’t miss any deductions you qualify for.

The IRS assumes that everyone qualifies for some deductions, so you don’t have to itemize them. You can automatically deduct $25,900 (married couples filing jointly) or $12,950 (single filers) for the 2022 tax year, no questions asked. That’s called “taking the standard deduction.”

Itemizing can lower your tax bill if, when you add up all of your deductions, the total is greater than the standard deduction for that tax year. 

What kinds of deductions can you itemize?

Many everyday expenses are legitimate deductions. Some common ones are:

• Property taxes

• State sales tax

• Mortgage interest on the first $750,000 of mortgage debt

• Medical and dental expenses if they exceed 7.5% of your income

• Long-term care insurance premiums

• Charitable contributions

• Educator classroom supplies ($250)

• Student loan interest

• Health insurance premiums if you are self-employed

• Business expenses if you are self-employed or own a business

What forms do you need for the home equity loan tax deduction?

Save documents that prove how you used the home equity loan or HELOC:

• Loan statements showing how much you borrowed

• Receipts, contracts, and other documents showing how the funds were used

• Form 1098, the Mortgage Interest Statement, from your lender showing interest payments. You’ll get separate 1098s for your mortgage, if you have one, and your home equity loan or HELOC.