Are Home Improvements Tax Deductible?
If you completed a home improvement project using a home equity loan or HELOC, including RenoFi Home Equity Loans and RenoFi HELOCs, you may be eligible for home mortgage-interest deductions.Apr 9, 2021 • Rich Garner
Many homeowners are taking on home renovation projects, and a significant portion of these homeowners financed these projects with home equity loans and HELOCs. What you may not realize is that the interest you pay on these loans might be tax deductible.
While some homeowners will choose to claim the expanded standard deduction on next year’s taxes, it may be worth it for homeowners who’ve renovated to look into claiming itemized deductions and writing off home equity loan interest.
Are you wondering if you’ll get a tax break on the money you spent fixing up your house? Well, it depends - on what improvements you make and how you keep track of your expenses.
In this article, we’ll discuss which types of home improvement projects are substantial enough to qualify for tax deductions.
What follows is general guidance. You should always consult a tax professional for your personal situation.
Can You Write Off Home Improvements?
According to the IRS, you can deduct interest paid on home equity loans if they’re used to “buy, build or substantially improve a taxpayer’s home that secures the loan.” The IRS defines this under Publication 936, called the “Home Mortgage-Interest Deduction.”
Keep reading to see which types of home improvements are considered to be “substantial.”
What is the Home Mortgage-Interest Deduction, and How Do You Qualify?
Every year, homeowners can choose to reduce to get a flat tax deduction, a standardized deduction, or take claim itemized deductions for things like mortgage interest, medical expenses, business expenses, etc.
In most cases, homeowners will choose which route they take based on their own personal circumstances, and which route will offer a larger deduction.
The home mortgage-interest deduction is a common deduction that will deduct interest from a primary or secondary mortgage (home equity loan) off of your taxes.
According to the IRS, for you to take a home mortgage interest deduction, your debt must be secured by a qualified home. If you use any type of unsecured loan to pay for home renovations, this will not qualify you for a mortgage-interest deduction.
What Counts As A Qualified Home?
This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. If you treat your second home as a rental property, you must use the home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer.
Therefore, homeowners with mortgage insurance premiums, home equity loan interest, or home mortgage interest can potentially deduct these things from next year’s taxes.
In most cases, you can deduct the entirety of your home mortgage interest, but the full amount depends on the date of the mortgage, the amount of the mortgage, and how you’re using the proceeds.
What Home Improvements Are Tax Deductible?
In order to qualify for tax deductions on your home equity loan or HELOC interest, the loan must be spent on the property whose equity is the source of the loan. You also must be using the loan for renovations that “substantially improve” your home. The full text of the mortgage interest deduction law is that you can deduct interest from a home loan used to “buy, build or substantially improve” your home.
Before the Tax Cuts and Jobs Act of 2017, all home equity loans were tax deductible, no matter what. Home equity loans are no longer deductible if the loan is being used for personal items like vacations, tuition, credit card debt, cars, clothing, etc.
What Is A Substantial Home Improvement?
If you’re using mortgage debt to fund home maintenance and minor repairs, this is not considered a substantial home improvement, unfortunately.
Minor repairs and maintenance include things like:
- Gutter cleaning
- Leaky pipe repair
- Power Washing
*Painting costs will count if they are parter of a larger substantial project
If you’re using a home equity loan or HELOC to fund larger projects that add value or new uses to your home, you can deduct loan interest.
Substantial projects include:
Accessory Dwelling Unit
Heating and Plumbing
Energy efficient Equipment
Medical expenses that were paid out of pocket and not reimbursed by your health insurance plan, including:
- Construction of ramps, widening doorways or hallways for wheelchair access, and installing modifications to bathrooms or stairways like lifts and handrails.
Interest Deduction Limits
There is a new limit to be aware of (as of the 2018 tax year) 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.
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 gist:
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 also offers variable interest rates that follow market rates, unlike a fixed-rate home equity loan.
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 current tax year, it may be worth claiming.
As always, consult a tax professional to discuss your specific financial situation and whether it makes sense for you.
That’s worth doing only if your deductible expenses add up to more than the amount of the standard deduction for the 2020 tax year:
- $24,800 for married couples filing jointly.
- $12,400 for single filers or married people filing separately.
- $18,650 for head of household.
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.
What Tax Forms Do You Need From Your Lender?
- Mortgage Interest Statement Form (Form 1098). Provided by your home equity loan lender, showing the total amount of interest paid during the previous tax year. If you don’t receive this form from your lender, you should contact them.
- 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.
Here are some other things to consider as you assemble any documents you might need:
- Make a folder to save all your receipts and records for home improvements.
- If you’ve lived in your house for many years and area housing prices have been going up, a portion of your gain on sale could be taxable. If so, you can reduce the taxable gain by including the improvements in the cost basis of the house.
- If you operate a business from your home or rent a portion of your home out to someone, you may be able to write off part of your home’s adjusted basis through depreciation.
To deduct interest from loan payments, you’ll need to itemize the deductions using a the IRS Form 1040 or 1040-sr.
Of course, you should always consult a tax professional for your personal situation.