Are Home Equity Loans Tax Deductible? A Guide

Most homeowners know that the interest they pay each year on their mortgage is tax-deductible. This means that they can deduct the amount of interest from their annual gross income, thus lowering their tax liability and saving sometimes hundreds, if not thousands, of dollars.

But are home equity loans tax-deductible as well? Sometimes known as a “second mortgage,” a home equity loan allows you to borrow cash at a fixed rate of interest using the equity you have in your house as collateral. In most cases, the interest you pay on that loan is also deductible if certain conditions are met. Let’s take a look.

Is Home Equity Loan Interest Tax-Deductible?

The question of whether — and how much of — the interest you pay on a home equity loan is tax-deductible depends on when you closed the loan and how you used the funds. The Tax Cuts and Jobs Act of 2017 changed the rules significantly, and both you and your tax advisor need to know the difference.

For taxpayers who closed a home equity loan on or after December 15, 2017, and through 2025, the IRS states that “if home equity loans or lines of credit secured by your main home or second home are used to buy, build, or substantially improve the residence, interest you pay on the borrowed funds is classified as home acquisition debt and may be deductible, subject to certain dollar limitations. However, interest on the same debt used to pay personal living expenses, such as credit card debts, is not deductible.”

If you closed your home equity loan before December 15, 2017, however, the IRS states that “for tax years before 2018 and after 2025, for home equity loans or lines of credit secured by your main home or second home, interest you pay on the borrowed funds may be deductible, subject to certain dollar limitations, regardless of how you use the loan proceeds. For example, if you use a home equity loan or a line of credit to pay personal living expenses, such as credit card debts, you may be able to deduct the interest paid.”

Note further that you can only claim interest paid on a home equity line of credit if you choose to itemize deductions on your tax return, as opposed to taking the standard deduction. The standard deduction lowers your income by one fixed amount. On the other hand, itemized deductions are made up of a list of eligible expenses. You can claim whichever deduction reduces your tax bill the most.

How Much Of Your Home Equity Loan Interest Is Deductible?

If you are currently making monthly payments on a home equity loan, or “second mortgage,” some or all of the interest on those payments is considered tax-deductible. How much you can write off depends on the Tax Cuts and Jobs Act of 2017, which changed the rules depending on your tax filing status, your total mortgage debt and the year you took out the HEL.

For taxpayers who closed on a home equity loan before December 15, 2017, the new rules allow the following home equity loan interest deductions:

• Married filing jointly: Taxpayers can deduct interest on home equity loans up to $1 million.
• Single filers/Married filing separately: Taxpayers can deduct interest on home equity loans up to $500,000.

For taxpayers who closed on a home equity loan on or after December 15, 2017, the following home equity loan interest deductions apply:

• Married filing jointly: Taxpayers can deduct interest on home equity loans up to $750,000.
• Single filers/Married filing separately: Taxpayers can deduct interest on home equity loans up to $375,000.

Rules And Limitations Of The Home Equity Loan Interest Deduction

The Tax Cuts and Jobs Act of 2017 not only established new rules for how much of your home equity loan interest was tax deductible, it also changed guidelines depending on how you used those home equity loan funds.

Your Home Equity Loan Was Used To Fund Home Improvements

If you closed your home equity loan before December 15, 2017, you have much wider freedoms to deploy those funds and still be able to write off the interest on your payments. If you use those funds to pay down credit card debt, renovate a bathroom in your house or go on a cruise, you can write off your home equity loan interest up to the allowable amount.

However, if you closed the loan on or after December 15, 2017, your ability to write off the interest is more restricted. In this case, the Internal Revenue Service (IRS) says that taxpayers can only deduct interest on home equity loans that were used to “buy, build or substantially improve” a primary residence or second home.

What does that mean? Here are some examples of expenditures that “substantially improve” your primary or second home, and some that don’t:

Examples that qualify:

• Down payment on a vacation home
• New windows
• Kitchen renovation
• New roof
• New furnace
• Large landscape installation

Examples that don't qualify:

• Credit card debt
• Student loan payment
• Tuition payment
• Family cruise
• Garden flowers

Remember, regardless of when you took out your home equity loan, you can use your funds for anything, anytime. It’s your money. We’re only making these distinctions for your tax write-off purposes. If you need to demonstrate that the funds are being used for improving your residence, you should have receipts that back up the claim.

You Have To Itemize Your Deductions

Even if you have used your home equity loan to fund significant home improvements, it might not be beneficial, or worth your time, to use your home equity loan interest payments as a tax deduction. This is because your interest payments, along with any other payments you wish to itemize (mortgage interest, property taxes, donations of clothing, support for a charity, etc.), must exceed the standard deduction to even bother with.

The standard deduction is what all taxpayers get automatically, and varies only depending on their filing status. Here are the standard deductions for taxes due in April 2024:

If your standard deduction exceeds the total amount of all the itemized deductions you can claim, your tax return will be easier and less costly to prepare, as well as being less open to scrutiny by the IRS.

How To Claim The Home Equity Loan Tax Deduction: 4 Steps

Once you’ve determined your tax filing status and know your standard deduction amount for the current year, you can decide whether it’s more advantageous to itemize by taking the following measures:

1. Determine Whether To Itemize Your Deductions

There is only one reason to claim your interest payments on a home equity loan as a tax deduction: if that amount, plus the combined amounts of all your other available itemized deductions, exceeds the amount of your standard deduction.

While it’s possible to determine this yourself, you may need the help of a professional tax preparer. These professionals have up-to-date knowledge on the tax laws and can identify all of your itemized deductions after a thorough review of your finances.

2. Review The Eligibility Requirements

Before you decide to itemize and claim interest on a home equity loan as a tax deduction, you need to make sure that the expenses you paid with the loan are qualified expenses. If you closed the loan before December 15, 2017, any expenses paid for by funds from the loan — student loan payments, credit card debt, family vacation — in the current tax year are qualified.

However, if the loan closed on or after December 15, 2017, current tax year expenses paid from the loan only qualify if they were used to “buy, build or substantially improve” a primary residence or second home. These expenses include things like a down payment on a second home, a kitchen renovation on your primary residence, a new roof, etc.

3. Collect Necessary Paperwork

Once you’ve determined that itemizing your deductions will reduce your tax more than the standard deduction, you can assemble the documents that verify your interest payments on a home equity loan. Whether you’re handing these documents off to a tax preparer or doing the returns yourself, be sure to keep a copy of each in case an IRS auditor wants to see proof of your claim.

• Mortgage interest statement (Form 1098): The financial institution that issued your home equity loan is legally required to mail you the Form 1098 Mortgage Interest Statement to report interest you paid if it exceeds $600. If the amount is less than $600, you can still request a 1098. You should receive this form early in the year, well before the April 15 tax deadline.
• Copy of your loan application: You should always keep copies of any loan application. In this case, it’s best to have multiple copies since you’ll likely be claiming interest payments on the same loan over multiple years.
• Copy of your Closing Disclosure: This document proves that the loan is real and will have information that ties it to the information supplied by your lender on Form 1098. Again, keep multiple copies for future filings.
• Receipts showing how loan funds were used: In the event of an IRS audit, you’ll need to show how funds from the home equity loan were used. This can be done with receipts that show full payment amounts to contractors, for example, or copies of cashed checks you can get from your bank. Remember that for home equity loans closed on or after December 15, 2017, expenses from the loan only qualify if they were used to buy, build or substantially improve your primary or second home.

4. Itemize Your Tax Deductions

Form 1040 is the standard U.S. individual tax return form that taxpayers use to file their annual income tax returns with the IRS. Use Schedule A of Form 1040 to list individual deductible expenses. Common itemized deductions include mortgage interest, state and local taxes, charitable contributions, and medical and dental expenses. These deductions can significantly reduce your taxable income, potentially leading to a lower tax bill.

Is Interest On A Home Equity Line Of Credit (HELOC) Tax Deductible?

Yes, by the same rules as for a home equity loan. You can only deduct the interest on a home equity line of credit (HELOC) if you used the funds to buy, build or improve your home, and you are itemizing deductions.

Additional Tax Breaks For Homeowners

Mortgage interest is just one of several types of tax deductions you can use to reduce your adjusted gross income and thus your tax. Here are some others specifically available to some homeowners:

• Mortgage insurance deduction: Allows you to deduct the interest you paid on private mortgage insurance (PMI) from your taxable income.
• Home improvement deduction: Improvements you make to your home that are considered necessary or beneficial for energy-efficiency.
• Local and state sales/Property tax deduction: But understand the rules, which are tricky.
• Home business expenses: If you own a business and use your house to conduct business, you can deduct a part of certain home expenses.

The Bottom Line

The interest you pay on your home equity loan adds up, and it can be written off your taxes if you decide to itemize deductions. The Rocket Money℠ app can be a useful tool for taxpayers who want to track their deductible expenses. It’s fast and easy to download the Rocket Money app today.