Home equity loans, HELOCs, the IRS, and you

One of the most common questions people ask about home equity loans and home equity lines of credit (HELOCs) is this: “If I borrow against the equity in my home, is the interest on the loan [or line of credit] tax deductible?”


Credit: peepo

It’s a great question, and now is the perfect time to review the IRS guidelines because they have recently changed. When the Tax Cuts & Jobs Act took effect on January 1, 2018, many of the rules pertaining to home equity borrowing changed. Not all the changes were advantageous for borrowers. Here’s a quick summary of what you should know about current tax laws pertaining to home equity loans and HELOC’s.

Loan Interest is Still Tax Deductible

The general answer to the question is “yes,” interest on a home equity line of credit or home equity loan is tax deductible, but there are some changes in the law that affect the amounts you can deduct. There are also a few new wrinkles in the law that control what you can use the loan proceeds for.

In the “good old days,” before 2018, you could deduct interest on home equity borrowing no matter what you used the money for. Now, in order to deduct even one dollar of the interest, you need to use the funds “substantially renovate your current home, buy an existing home or build a new one.

Read the Fine Print of the Law

What’s the meaning of “substantial” improvement according to the IRS? The taxing authority allows limited meaning for the word. When you borrow against your house, you’ll need to use the money to build a new home, buy an existing one or substantially improve the one you’re in. If you opt for substantial improvements, those must include “adding value to the home,” “prolonging its useful life,” or adapting it for a new use.

That’s the IRS’s way of saying, “Sorry, homeowners, a paint job, roof repair or other cosmetic upgrades do not qualify for tax deductible interest on your HELOC or home equity loan interest.” If you don’t upgrade but buy or build a home with the money, you have an easier time staying within the legal parameters for deducting interest on the loan.

Show Me the Money

Staying within usage limits is one thing, adhering to new loan maximums is another. The Tax Cuts & Jobs Act provisions clearly set out loan amounts on which you can deduct interest. A married couple, for example, can deduct qualified interest on home equity loans as large as $750,000. The limits are different depending on your filing category. Filing “separately” means the limit is only $375,000. For all taxpayers who want to deduct the interest, the home in question must have been purchased after December 15, 2017.

The IRS allows a bit of “wiggle room” for people who purchased homes prior to December 15, 2017. In that case, married filers can deduct interest on loans of $1 million or less. “Filing separately” means the amount of the original loan can be as high as $500,000.


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