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A home equity line of credit, or HELOC, can be a great financial product for many homeowners. This line of credit lets you borrow against the equity in your home, which you can use for repairs, renovations, or anything else you have in mind.
As tax time rolls around, you may be wondering if the interest on a HELOC is tax deductible. Here’s an overview of when you can deduct this interest, when you can’t, and what you’ll need to provide to the IRS in order to claim the mortgage interest deduction.
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Is interest on a HELOC tax deductible?
The simple answer is yes, interest on a home equity line of credit can often be tax deductible, but not always.
Whether or not you can claim the interest you paid on a HELOC on your tax return depends on how you used the money.
The Tax Cuts and Jobs Act (TCJA) of 2017 amended the deduction that allows taxpayers to deduct mortgage interest on a principal or secondary residence, also known as a qualified residence. With the passage of this law, HELOC tax deductions are suspended from 2018 to 2026 unless you meet certain criteria.
When can you claim interest on a HELOC
Interest charged on a home equity line of credit may be considered tax deductible as long as it meets the following requirements:
- The loan must be secured by the principal residence or secondary residence (qualified residence) of the taxpayer.
- Funds borrowed with the HELOC must be used to buy, build or improve that same house (or houses).
This means that if you borrow against the equity in your primary home with a HELOC and use those funds to renovate the kitchen, build a home addition, or repair your roof, the interest charges on that HELOC are likely deductible. of tax.
When you can’t claim interest on a HELOC
On the other hand, your HELOC interest may not be tax deductible if it does not meet the criteria above. So if the house isn’t your primary or secondary residence, if you’re using the funds to improve a third property, or if you’re using the money for non-home improvement expenses, you probably won’t be able to. not claim interest. on your tax return.
For example, if you take equity out of your home with a HELOC, then use those funds to pay off your student loans, go on vacation, pay off credit card debtor buy an investment property, the interest will likely not be tax deductible.
How does the mortgage interest deduction work?
The mortgage interest deduction allows you to write off some of the interest on your mortgage, as long as you follow certain IRS guidelines. This can help reduce your overall tax burden by reducing your taxable income for that tax year.
To benefit from the mortgage interest deduction, you must ensure that:
- The mortgage debt on your home(s) does not exceed $750,000 in total (or $375,000 if you are married and filing separately). If your total mortgage debt exceeds this amount, only a portion of your mortgage interest for the year may be tax deductible. Prior to December 16, 2017, higher mortgage limits applied – $500,000 for married taxpayers filing separately or $1 million for everyone else.
- You only deduct interest paid on your primary or secondary residence. Additional properties are excluded from this deduction.
- You detail your deductions. You can only take advantage of the mortgage interest deduction if you itemize. If you choose to take the standard deduction at tax time, it will not take into account the specifics of your mortgage interest paid for the year.
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How to Claim the Mortgage Interest Tax Deduction
Claiming the mortgage interest deduction is relatively simple, whether you’re claiming interest paid on your primary mortgage or from an eligible HELOC:
- Gather your tax documents. Your lender should send you a Form 1098, Mortgage Interest Statement, showing the amount of mortgage interest you paid on your loan during the previous tax year. Lenders are required to send this form as long as you paid $600 or more in interest that year. You will also need your final disclosure document, which tells you the amount of money borrowed in equity in your property. Be sure to keep your documents in a safe place until you are ready to file your tax return.
- Determine if your loans qualify. The mortgage debt limit is $750,000 for most filers, which includes the mortgage and any additional loans — like a HELOC or second mortgage — on your primary or secondary residence. If your combined loans exceed this amount, you will not be able to deduct all of your mortgage interest.
- Determine if your expenses are eligible. Interest paid on a HELOC is tax deductible as long as you use the funds to purchase, repair, or make substantial improvements to the property securing the loan. So, if you take out a HELOC on your primary residence to renovate your secondary residence, the interest will not be eligible. But if you instead spend that HELOC money on your primary residence, some or all of it may qualify.
- Keep your receipts. If you ever get audited, it will be important to provide proof that you used HELOC funds on an eligible property.
- Itemize your deductions when you file your taxes. For some taxpayers, the standard deduction may result in a reduction in the tax burden for the year. For others, however, itemizing deductions may be more beneficial. For the 2021 tax year, the standard deduction for married couples filing jointly is $25,100; for single filers or married couples filing separately, the standard deduction is $12,550. It’s important to decide what’s best for you and your tax situation – specifically deducting interest from a HELOC can only be done by itemizing.
If you have questions about your taxes – or deductions you can itemize in order to claim home equity loan or HELOC interest — it is best to speak with a tax professional.
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In addition to the mortgage interest tax deduction, homeowners who itemize their deductions can take advantage of many other tax benefits, including:
- Property taxes (property) — State and local property taxes paid on your home may be tax deductible. This deduction is limited to $10,000 per year, or $5,000 if you are married and filing separately.
- Eligible Mortgage Loan Insurance Premiums — Private Mortgage Insurance, or PMI, is required on most conventional mortgages with a down payment of less than 20%. If you paid mortgage insurance premiums during the year, you may be able to deduct that expense.
- Mortgage points — If you paid points to reduce the interest rate on your home loan, you may be able to deduct them from your itemized taxes.
Taking out a home loan can be expensive, especially considering the interest charges. If you plan to leverage the equity in your home with a HELOC, you may be able to deduct these interest charges when you file your taxes. If you want to learn more about HELOC interest, mortgage interest, and detail your deductions, talk to a tax professional you trust.