Is HELOC interest tax deductible?

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In a Nutshell

Interest paid on a home equity line of credit may be tax deductible for a primary or second residence if you use funds to improve your house. Still, limits apply, and you must itemize to qualify for the deduction.
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Interest paid on a HELOC may be tax deductible, an advantage that doesn’t apply to personal loans or credit cards.

Interest rates on HELOCs might be lower than other forms of credit because your house secures the debt. We’ll cover what the HELOC interest tax deduction is and who qualifies for it.

Is HELOC interest tax deductible in 2023?

A home equity line of credit or HELOC is a credit line secured by your house that you can apply for and draw money from on an ongoing basis. Currently, taxpayers are allowed to deduct interest paid on a HELOC if the following conditions are met:

  1. The HELOC is secured by a “qualified home” that you own. A qualified home is a primary residence or second home, like a vacation home. But if you rent out the second home, you must live in it for at least 14 days or 10% of the days it’s available for rent (whichever is longer) for it to be considered a qualified home.
  2. You use HELOC funds to improve the home. Home improvements could include projects like renovating your kitchen or adding another room to the house.
  3. You itemize deductions. Instead of taking the standard deduction, you must itemize deductions to qualify for the mortgage interest tax break.
  4. You meet loan limits. The interest you can deduct depends on your mortgage balances, the date you took out loans and your filing status.

HELOC interest deduction limitations

The interest you can deduct for loans secured by your home is based on whether you borrowed before or after Dec. 16, 2017. Here’s what you need to know.

  • Mortgages taken out before Dec. 16, 2017 — Interest is fully deductible on mortgage debt (including HELOCs) that total $1 million or less ($500,000 if married filing separately).
  • Mortgages taken out after Dec. 16, 2017 — Interest is fully deductible on mortgage debt totaling $750,000 or less ($375,000 if married filing separately).

Note this limit is a combined amount for mortgage indebtedness. So if you’re single and took out a $350,000 mortgage to buy a home in 2020 and then a $10,000 HELOC in 2022 to refinish the floors, your mortgage debt in total would be $360,000. This is below the full deduction threshold, which means all interest paid may be deductible.

When is interest on a HELOC tax deductible?

The rules are strict here: Interest paid on a mortgage is only tax deductible if the money is used to “buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS. Here are a couple of scenarios that do and don’t qualify.

Example of when you can deduct HELOC interest

Say your home has two bathrooms, and you want to build a third bathroom in your main bedroom for more privacy when guests visit. You decide to take out a HELOC to cover the cost of building walls and installing a shower, plumbing and toilet.

Since this upgrade improves your home, the interest you pay on the HELOC may qualify for a tax deduction, as long as this is a first or second home and you itemize deductions.

Example of when you can’t deduct HELOC interest

Using a HELOC for any personal expense unrelated to improving your first or second home wouldn’t qualify for a tax deduction. For example, if you buy a car, interest paid on a HELOC to cover the cost wouldn’t qualify for the tax deduction. Suppose you take out a HELOC to cover other expenses, like adoption or education costs. That interest wouldn’t be deductible, either.

How the mortgage interest tax deductible process works

During tax season, you’ll file Form 1040 or 1040-SR and use Schedule A to itemize deductions. Mortgage companies should send you Form 1098, Mortgage Interest Statement, at the end of the year, which can help you fill out the form.

Whether it makes sense to itemize mortgage interest depends on how many other deductions you have. For 2022, the standard deduction is $12,950 for single filers, $25,900 for joint filers and $19,400 for heads of household. If mortgage interest and other itemized deductions don’t surpass this amount, taking the standard deduction may be the way to go.

How to claim a HELOC interest deduction on taxes

If you have a HELOC and want to deduct interest, here are the steps to take next.

  • Determine whether your credit line qualifies. A HELOC needs to be secured by your primary residence or second home. To get the full deduction, your total mortgage debt must be below $750,000 (or $1 million if you borrowed before 2018).
  • Confirm how you used HELOC funds. Your HELOC must be used on qualifying expenses — like a home upgrade, renovation or remodel — to be eligible for the interest tax deduction.
  • Pull the receipts. Keep receipts of purchases you made for your home renovation project as a backup to prove you used HELOC funds for home upgrades.
  • Gather financial documents. Your mortgage lender should send you Form 1098 to report interest paid on tax documents. You can also assemble your own mortgage statements to confirm what’s on the mortgage lender’s final statement for the year.
  • Complete Schedule A. With the help of a tax preparer, tax software or by hand, complete Schedule A to itemize your deductions and attach it to Form 1040 for your tax filing.

The difference between a HELOC and a home equity loan

Interest paid on both HELOCs and home equity loans may be tax deductible, but these debt vehicles work differently from one another. Both HELOCs and home equity loans let you borrow money from home equity, but one is a form of revolving credit while the other is an installment loan.

With a HELOC, you draw the money you need from the credit line like a credit card, and you’re only charged interest on the balance. A home equity loan, sometimes called a second mortgage, is an installment loan that provides you with a lump sum, and the balance is repaid in equal payments. Interest applies to that lump sum you’ve borrowed until it’s entirely paid off.

What’s next?

Tax software could help you determine if you qualify for the mortgage interest tax deduction by asking questions about what you borrowed and how you used the money.

But whenever you’re in doubt about your tax filing, consider calling in a professional. They can run through your financial situation and tax scenario to determine if you can deduct interest, and knowing a tax code expert looked at your filing could give you peace of mind.

About the author: Taylor Medine is a freelance writer who’s covered all things personal finance for the past seven years. She enjoys writing financial product reviews and guides on budgeting, saving, repaying debt and building credit. … Read more.