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When you borrow on your home’s equity, there may be a bonus: The interest you pay each year is tax-deductible up to a government-imposed limit, as long as the borrowed money goes toward improving your home.
Claiming a home equity loan interest deduction
Claiming the deduction isn’t difficult. To deduct the interest paid on your home equity loan or on a home equity line of credit, known as a HELOC, you’ll need to itemize deductions at tax time using IRS Form 1040. That’s worth doing only if your deductible expenses add up to more than the amount of the standard deduction for the 2019 tax year: $12,200 for a single person or married people filing separately; $24,400 for a married couple filing jointly; and $18,350 for heads of households.
» MORE: Learn more about tax deductions for homeowners
Not all home equity loan interest is deductible
The IRS allows interest deductions on up to $750,000 or $1 million in mortgage borrowing, depending on when the loan originated and whether you’re filing with or separately from your spouse. That limit applies to the combined amount of all loans secured by a qualifying property — whether they are first (your primary mortgage) or second (home equity) mortgages.
For 2019, you can deduct the interest paid on home equity proceeds used only to “buy, build or substantially improve a taxpayer’s home that secures the loan,” the IRS says.
That rule went into effect for the 2018 tax year and was a big change from prior years, when you could deduct the interest regardless of what you used the money for.
Rules the same for HELOC interest tax deduction
Home equity loans and lines of credit are different products, but the interest deduction rules are the same.
With a home equity loan, you borrow a lump sum over a set period of time at a fixed interest rate. HELOCs are more flexible by comparison. After qualifying to borrow a certain amount, you can take out those funds at any time during the draw period, which usually lasts for 10 years. The interest rate on a HELOC is adjustable, or variable, and follows market rates.
» MORE: Smart uses for your home equity loan or HELOC funds
Collect the right tax forms from your lender
Before tax time, you should receive an IRS Form 1098, or Mortgage Interest Statement, from your lender or lenders. It shows the interest you paid on your primary mortgage, home equity loan or HELOC in the previous year. You’ll need this form if you want to deduct the interest on your home equity loan or line of credit. Call your lender if you don’t get a 1098 or if you want help in understanding it.