How HELOCs Affect Your Taxes

By Kevin Brouillard · May 13, 2024 · 7 minute read

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How HELOCs Affect Your Taxes

When you take out a mortgage, you can deduct the amount of money you pay on mortgage interest from your taxable income. But is home equity line of credit (HELOC) interest tax deductible, too? Put simply, it depends on when you took out the HELOC and how much mortgage debt you have.

Here’s what you need to know about HELOC tax deductions, including the requirements and limitations on HELOC tax-deductible expenses, plus how to calculate your deduction.

What Is a HELOC?

Whether to cover renovation costs or consolidate debt, homeowners can borrow against the value of their home to secure the necessary funding. There are two main types of home equity loans: a conventional home equity loan and a home equity line of credit, also known as a HELOC. A HELOC functions as a revolving line of credit that uses home equity — the home’s value minus the amount you still owe on the primary mortgage — as collateral.

How much you can borrow typically ranges from 75% to 85% of your home equity. Generally, lenders require a minimum of 15% to 20% equity in your home to be eligible for a HELOC.

When comparing a HELOC vs a home equity loan, a key difference is that a HELOC allows you to draw funds as you need them, up to a maximum limit, over a draw period (often 10 years). By contrast, home equity loans disburse funds all at once.

With HELOC loans, you pay interest only on the amount you withdraw. Once the draw period ends, any remaining borrowed funds and interest are repaid over a repayment period, which can vary but typically spans 10 years.

Dive deeper: What Is a Home Equity Line of Credit?

How Does a HELOC Affect Your Taxes?

The interest paid on a HELOC could qualify as a tax deduction to lower your taxable income. If you own a home and are planning to claim a HELOC tax deduction, there are some requirements and limitations to keep in mind.

Turn your home equity into cash with a HELOC brokered by SoFi.

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Requirements for the HELOC Interest Tax Deduction

To answer “is interest on a HELOC tax deductible,” it’s essential to check that you meet certain requirements set by the Internal Revenue Service (IRS).

Since the Tax Cuts and Jobs Act of 2017, there are stricter requirements for how funds are spent to be eligible for a HELOC tax deduction. Specifically, funds from a HELOC must be used to buy, build, or improve a qualifying home — either a primary or second home. Eligible expenses can range from rewiring a house to replacing a roof or remodeling a kitchen. Note that funds must be spent on the same property used to secure the HELOC.

It’s also required that you have positive equity in the home used to secure the HELOC. If you have an underwater mortgage, meaning you owe more on the home than its value, you are not eligible for a HELOC tax deduction.

These requirements are in place for tax years 2018 through 2025. Prior to the rule change, a HELOC tax deduction could be made for interest paid on debt used for any type of personal expenses, not just home improvements.

Recommended: Cash Refinance vs. Home Equity

HELOC Tax Deduction Purchase Limits

HELOC tax deductions are not unlimited. So, up to what amount are HELOC loans tax deductible?

The IRS allows you to deduct interest on a maximum of $750,000 in residential loan debt (or $375,000 if married filing separately), including the primary mortgage and a HELOC. For instance, if you had $700,000 left on a home mortgage loan and $150,000 in HELOC debt, you could only deduct interest on the first $750,000 of debt.

If your primary mortgage or HELOC was approved before the 2018 tax year, you may be eligible to claim interest up to the previous limit of $1 million (or $500,000 if married filing separately). Borrowers who took out a HELOC in 2017 or earlier should note that the rule change did away with the $100,000 limit (or $50,000 if married filing separately) on home equity debt for tax deductions.

Tax Deduction Limits on Primary Mortgages

The tax deduction limits on primary mortgages are based on when the mortgage loan was taken out.
If you took out a mortgage before October 13th, 1987, there is no cap on mortgage interest tax deductions. Homebuyers who got a mortgage between October 13, 1987 and December 16, 2017, can deduct interest on up to $1 million in total mortgage debt for married couples filing jointly and single filers. The limit is $500,000 for married couples filing separately.

If you took your mortgage out after December 16, 2017, you can deduct up to $750,000 (or $375,000 if married filing separately).

These limits applied to all combined mortgage debt, including first homes, second homes, and HELOC loans.

Is Home Equity Loan Interest Tax Deductible?

The tax deduction rules for home equity loan interest is the same as a home equity line of credit. As long as you’re using funds to buy, build, or improve a home, you can claim a tax deduction on mortgage debt up to $750,000.

Recommended: What Is a Home Equity Loan?

How to Calculate a HELOC Interest Tax Deduction

Prior to filing taxes, you should receive IRS Form 1098 from your HELOC and mortgage lenders. This form indicates the interest you paid on your HELOC, primary mortgage, or home equity loan in the previous year.

If you used any HELOC funding for ineligible uses, such as personal expenses or debt consolidation, you’ll need to subtract that portion to get the deductible interest.

Besides the interest you paid on your primary mortgage and HELOC loan, total up other deductions like property taxes, mortgage points, and student loan interest. Since you can only deduct mortgage and HELOC interest payments with an itemized deduction, it’s important to check that the total of your deductions exceeds the standard deduction amount.

Here are the standard deduction amounts for tax year 2024:

•   Single or Married Filing Separately: $14,600.

•   Married Filing Jointly or Qualifying Surviving Spouse: $29,200.

•   Head of Household: $21,900.

If the mortgage and HELOC interest, plus other tax deductions you’re eligible for, exceed the above amounts, then it’s worth considering itemizing.

Recommended: Personal Line of Credit vs. HELOC

How to Deduct Home Equity Loan Interest

To deduct home equity loan interest, you’ll need to gather any receipts or invoices documenting how the money was spent. Be sure to keep records of transactions for eligible home renovations and improvements to verify your deductions in case you are audited by the IRS.

Once you’ve compiled all the necessary documentation, you’ll itemize your deductions using Schedule A of IRS Form 1040.

Does a HELOC Affect Property Taxes?

While the amount you take out through a HELOC won’t affect your property taxes, the improvements you make to your home could potentially increase the value of your home. If your renovation is substantial and involves a permit, it could be more likely to change the appraised value and potentially increase your property taxes.

The Takeaway

You can deduct the interest paid on your HELOC if the funds are used to buy, build, or improve your home. HELOC tax deductions must be itemized, and they are only allowable for the first $750,000 in mortgage debt on qualifying primary and secondary residences.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 95% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Do you report a HELOC on your taxes?

You report your HELOC interest on your taxes if you’re claiming an itemized deduction and you used your HELOC to build or improve your home.

Will a HELOC appraisal raise my taxes?

No, a HELOC appraisal will not raise your taxes. Property taxes are based on the appraised value of your home by your local government.

Does HELOC affect capital gains tax?

No, a HELOC does not affect capital gains tax on a home sale.


Photo credit: iStock/damircudic

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