Are the interest rates on a HELOC tax deductible?

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The interest of a HELOC is tax deductible in some cases. Find out when you can claim this interest on your tax return. (Shutterstock)

A home equity line of credit, or HELOC, can be a beneficial financial product for many homeowners. This credit line allows you to borrow against your home equity, which you can use for repairs, renovations or whatever else you have in mind.

As tax time goes by, you may be wondering if interest on a HELOC is tax deductible. Here’s a look at when you can deduct this interest, when you can not, and what you need to provide to the IRS to claim your mortgage interest deduction.

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Are the interest rates on a HELOC tax deductible?

The simple answer is yes, the interest in a home equity credit line can often be tax deductible – but not always.

Whether or not you can claim the interest you paid on a HELOC in your tax return depends on how you used the money.

The Tax Cuts and Jobs Act (TCJA) of 2017 changed the deduction that allows taxpayers to deduct interest on mortgages on a primary or secondary residence, also known as a special residence. With the passage of this law, tax deductions in HELOC are suspended from 2018 until 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 as a deductible tax if it meets the following conditions:

  • The loan must be secured by the taxpayer’s main residence or secondary residence (special residence).
  • The funds borrowed with HELOC should be used either to buy, build or improve the same house (or residences).

This means that if you borrow the capital of your main residence with a HELOC and use these funds to renovate the kitchen, build an addition to the house or repair your roof, interest on this HELOC is likely to be tax deductible. .

When you can not claim interest on a HELOC

On the other hand, HELOC interest may not be tax deductible if it does not meet the above criteria. Therefore, if the home is not your primary or secondary residence, if you use the money to improve a third property or if you use the money for non-home improvement expenses, you will probably not be able to claim tax interest. your statement.

For example, if you take stock out of your home with a HELOC, then use these funds to repay your student loans, go on vacation, pay off credit card debtor buy an investment property, interest will probably not be tax deductible.

How does a mortgage interest deduction work?

The mortgage interest deduction allows you to write off part of your mortgage interest, as long as you follow certain IRS guidelines. This can help you reduce your overall tax burden by lowering your taxable income for that particular tax year.

To receive a mortgage interest deduction, you must ensure that:

  • Mortgage debt on your home (s) does not exceed a total of $ 750,000 (or $ 375,000 if you are married with a separate statement). If your total mortgage debt exceeds this amount, only a portion of your mortgage interest for the year may qualify for a tax deduction. Prior to December 16, 2017, there were higher levels of mortgages – $ 500,000 for married taxpayers applying separately or $ 1 million for everyone else.
  • Only deduct interest paid on your primary or secondary residence. Additional properties are excluded from this subtraction.
  • You collect your deductions. You can receive a mortgage interest deduction only if you do it in detail. If you choose to receive the standard deduction during the tax period, this will not take into account the specifics of the mortgage interest paid for the year.

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How To Claim Your Home Mortgage Tax Deduction

Applying for a home equity loan is relatively straightforward, whether you are claiming interest on your home mortgage or an eligible HELOC:

  1. Collect your tax documents. Your lender should send you a Form 1098, Mortgage Interest Statement, which shows how much mortgage interest you paid on your loan in the previous tax year. Lenders are required to send this form if you paid $ 600 or more in interest that year. You will also need the closing disclosure document, which shows you the amount of money you have borrowed. share capital from your property. Make sure you keep your documents in a safe place until you are ready to file your taxes.
  2. Determine if your loans qualify. The mortgage limit is $ 750,000 for most fillers, which includes the mortgage and any additional loans – such as a HELOC or a second mortgage – for your primary or secondary housing. If your loans together exceed this amount, you will not be able to claim all of your mortgage interest as a deduction.
  3. Determine if your expenses qualify. Interest paid on a HELOC is tax deductible if you use the funds to purchase, repair or make substantial improvements to the property secured by the loan. So, if you rent a HELOC in your main house to renovate your second house, the interest will not qualify. But if you spend this HELOC money on your main house, some or all of them may qualify.
  4. Save your receipts. If you are ever audited, it will be important for you to provide proof that you have used the HELOC funds on an eligible property.
  5. Record your bookings in detail when submitting your taxes. For some taxpayers, the standard deduction may result in a lower tax burden for the year. For others, however, the detailed discount may be more beneficial. For fiscal year 2021, the standard deduction for married couples filing together is $ 25,100. For unmarried or married couples filing separately, the standard discount is $ 12,550. It is important to decide what is best for you and your tax situation – the deduction of interest specifically from a HELOC can only be done by registration.

If you have questions about your taxes – or what reductions you can analyze to claim housing equity loan or HELOC interesting – it is better to talk to a tax expert.

If you want to use shares in your home to pay for home improvement projects, cash refinancing can be an option. Credible allows you compare mortgage refinancing rates from various lenders within minutes.

Other tax benefits for homeowners

In addition to deducting mortgage interest tax, homeowners who analyze their discounts can benefit from many other tax benefits, such as:

  • Real estate taxes (real estate) – Both state and local real estate taxes paid on your home can be deducted from the tax. This discount is limited to $ 10,000 per year or $ 5,000 if the marriage is filed separately.
  • Special mortgage premiums – Private mortgage insurance, or PMI, is required on most conventional mortgages with a down payment of less than 20%. If you paid mortgage premiums during the year, you may be able to deduct this cost.
  • Housing points – If you have paid points to lower your mortgage rate, you may be able to deduct them from your detailed taxes.

Obtaining a home equity loan can be costly, especially when considering interest rates. If you plan to withdraw from your home equity with a HELOC, you may be able to deduct these interest charges when it comes time to file your taxes. If you want to know more about HELOC interest, mortgage interest and booking details, consult a reputable tax professional.

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