Are Home Equity Loans Still Tax Deductible?
What the new tax reform will mean for financing your future renovation project
The Tax Cuts and Jobs Act of 2017 has reduced the number of tax breaks for homeowners, which may have you wondering about its impact on home equity loans. While all home equity loans were previously tax deductible before the new tax law, it will now depend on what exactly the loan is being used for. Here’s a simple breakdown of what the tax reform means for your home renovations.
What follows is general guidance. You should always consult a tax professional for your personal situation.
Is a Home Equity Loan Tax Deductible in 2020?
There are three main things considered when determining whether or not your home equity loan will be tax deductible. Here’s what you need to know.
How Your Financing is Used Matters
The good news is that when planning a major home renovation project, the interest paid on your renovation home equity loan is still tax deductible. But you have to use if for your actual renovations, since these major changes substantially improve the home that secures the mortgage. Home equity loans will no longer be deductible if the loan is being used for personal items like vacations, tuition, credit card debt, cars, clothing, etc. So as long as your renovation home equity loan is being used to meaningfully improve your home, you can benefit from deductions like in the past.
New Interest Deduction Limits
There is a new limit to be aware of so that you can deduct the interest from your renovation home equity loan. For married couples, mortgage interest on total principal of up to $750,000 of your home equity loan amount can still be deducted, which was reduced from $1,000,000 pre-tax reform. For single homeowners, the magic number is now $375,000; down from $500,000. So as long as your loan amount doesn’t exceed these values, you can still deduct the interest paid. There are plenty of home equity loan calculators out there to help give you a better idea of what your loan amount may be.
Your Residence Must Qualify
Last, but not least, your renovation home equity loan must be on a qualified residence; which usually means your primary home or second home. Simple enough.
Should I Deduct Interest on My Home Equity Loan?
So now that you know if you can get a tax deduction on your home equity loan, you’re wondering whether or not you should. Assuming your home equity loan used for your home improvements qualifies, you’ll want to calculate your total mortgage interest after all monthly payments are made. If your deductible expenses — including the second mortgage interest payments — is higher than the standard deduction for the 2020 tax year, it may be worth claiming. But as always, consult a tax professional to discuss your specific financial situation and whether it makes sense for you.How to Claim a Home Equity Loan Interest Deduction
In order to claim a deduction on your home equity loan interest, you’ll want to get pretty good at keeping detailed records of your expenses. Be sure to keep receipts of everything your spend throughout your home renovation project, as well as bank statements to show where the money went.
Before tax time, collect the following documents to help make your claim:
- Mortgage Interest Statement Form (Form 1098). Provided by your home equity loan lender, showing total amount of interest paid during previous tax year.
- Statement for additional paid interest. This is only applicable if you paid more home equity loan interest than what’s shown on your Form 1098. You’ll need to write the additional interest amount paid, explain the discrepancy, and provide this statement with your tax return.
- Proof of how home equity funds were used. These receipts and invoices will show expenses that significantly improved the value, durability, or adaptiveness of your home — including costs for materials, labor fees, and home improvement permits.
Does HELOC Interest Tax Deduction Work the Same Way?
While home equity loans and home equity lines of credit are two different products, their interest rate deductions rules are the same. If you’re not sure the difference between the two, you can learn more about HELOCs here, but here’s the jist. A home equity loan allows you to borrow a lump sump over a set period of time with a fixed interest rate, while HELOCs are a little more flexible. With a line of credit, you can access the funds on that line of credit at any time during the established draw period (usually 10 years). The HELOC is also adjustable, or variable, and follow market rates, unlike a fixed-rate home equity loan.
The Main Takeaway
So while many taxpayers will see differences in their taxable income calculations this year, the good news is that you can still benefit from deductions on the financing you need to make your renovation dreams come true! Contact RenoFi to discuss the details of your future renovation project and your unique financial situation. We can help you understand the options available to you and pair you with the right lender, so you can get started today.