At a Glance
The Tax Cuts and Jobs Act, passed in 2017, added more limitations to tax deductions on home equity loans.1 But the bottom line is, the interest you paid on home equity loans still may be tax deductible.
Claiming a Home Equity Loan Tax Deduction
To claim a deduction on your home equity loan interest, you need to itemize deductions using IRS Form 1040. This isn’t beneficial to everyone with a home equity loan, though. It’s only worthwhile if your deductible expenses are greater than the amount for the standard deduction. For the 2019 tax year, the standard deduction for a single or married person filing separately is $12,200, a married couple filing jointly is $24,400, and a head of household is $18,350.2
The alternative minimum tax (AMT) may come in to play as well. This sets a limit on the benefits of taxpayers with high economic income. The exemption amount for the 2019 tax year is $71,700 and begins to phase out at $510,300. For married couples filing jointly who apply for the exemption, the amount is $111,700 and begins to phase out at $1,020,600.
Itemizing home equity loan interest payments likely doesn’t benefit high-income earners.
Rules for Deducting Home Equity Loan Interest
If you’re still not sure what to do, follow these guidelines.
What can you deduct?
Depending on when you bought your home, you’ll be dealing with different limits. If you bought your home after December 15, 2017, you can deduct interest on loans up to $750,000 as a married couple filing jointly and $375,000 if you are single or filing separately.
If you purchased your home on or before December 15, 2017, you should be grandfathered into the previous limits on qualifying loans. In that case, married couples filing jointly can deduct interest on loans up to $1 million and single people or married couples filing separately can claim up to $500,000.3
To figure out how much of your total interest may be tax deductible, add up the totals of your first mortgage and your home equity loan. Make sure it doesn’t exceed the above maximums. If the total is greater than than the acceptable limits, you will only be eligible to deduct a fraction of the paid interest.
Which loans qualify?
Only mortgage-related interest on your first or second home is considered tax deductible.
What are you able to spend the money on?
Before the Tax Cuts and Jobs Act was passed, you could use home equity proceeds however you wanted. Now, the IRS requires that you use the deducted interest to “buy, build, or substantially improve [your] home that secures the loan.”4
What doesn’t qualify?
Anything that falls outside of a substantial home renovation on a first or second home will not qualify for the deduction. Rental properties are not eligible for home equity loan deductions.
How do you prove what the money was spent on?
You’ll want to hold on to all receipts and invoices involved in any renovations done to your home. If you get audited, you’ll need these as proof for how the money was spent.
Get the Right Tax Forms from Your Lender
To deduct interest on your home equity loan, you’ll need IRS Form 1098. You should receive Form 1098, or a Mortgage Interest Statement, from your mortgage and home equity lenders by the end of January. This will show the interest you paid on each loan for the previous year.
You may also need Publication 936 from the IRS to calculate how much interest you’re able to deduct if your loans are approaching the maximum amount or you used part of the loans for expenses that don’t qualify.
More Homeowner Tax Breaks
Home equity loans aren’t the only ways you can find a tax break.
If you borrow more for your first mortgage than your home equity loan, there’s more deductible interest. You can also deduct the interest on loans for refinanced mortgages up to the purchase price of the home.
If you opt to itemize your deductions, it’s possible to deduct the points you paid on your mortgage at closing to get a lower interest rate in the long term. You can either deduct the points upfront when you buy the house or throughout the course of the loan.
To get a tax break with property taxes, you’ll need to itemize your deductions. Before the Tax Cuts and Jobs Act, 100% of these taxes were deductible. Now, married couples filing jointly can write off up to $10,000 paid in state and local property taxes. Individual filers or married couples filing separately can deduct up to $5,000.
Under capital gains tax laws, you can keep part of the profits from selling your home tax-free. The IRS generally lets you exclude up to $500,000 on sale-related gains if you’re a married couple filing together and $250,000 if you’re filing as an individual.5
- H.R.1 - 115th Congress (2017-2018): An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018
- IRS provides tax inflation adjustments for tax year 2019
- Publication 530 (2020), Tax Information for Homeowners
- Interest on Home Equity Loans Often Still Deductible Under New Law
- Topic No. 409 Capital Gains and Losses