Is a Home Equity Line of Credit Tax Deductible?

By Anton Behr

  • Overview

    Homeowners enjoy special tax incentives from the federal government, including tax deductions that can be applied to home equity lines of credit. Depending on your situation, you may be able to save a significant amount on your tax bill each year by deducting costs related to your home equity line of credit. Read on to learn how.
  • What is a Home Equity Line of Credit?

    A home equity line of credit is, essentially, a loan in which your home serves as collateral. This differs from a mortgage in that the money can be used for purposes other than financing a the purchase of a home. However, the Internal Revenue Service treats a home equity line of credit very similarly to a mortgage. Because of this, homeowners enjoy the same tax benefits as they do with their mortgages.
  • Interest vs. Principle

    There are two parts to the total sum of money that you owe your lender: the principle and the interest. The principle is the actual amount that you are borrowing and the interest is the amount that the lender charges you to compensate for inflation and to subsidize their services. For example, if you were to take out a 30 year $50,000 home equity line of credit at a 6 percent interest rate with monthly payments of $300, the total amount you would owe would be approximately $100,7920 after 30 years. Approximately $57,920 of that amount is interest. This is the portion of your debt that is tax deductible.

  • Deductions

    The amount you can deduct depends on how you use the money. If you use the money from your HELOC to make improvements on your home, you are allowed to deduct the interest on a HELOC up to $1 million per married couple or individual. For all other uses, such as tuition or debt consolidation, you can deduct the interest on a HELOC up to $100,000.
  • How to Deduct

    You can apply the amount that you paid towards your interest for the tax year by itemizing the deduction on Schedule A of your 1040. In order to determine how much you spent towards interest, ask your lender for a receipt or consult your repayment schedule. Note that your payments apply varying ratios of principle to interest over the life of your loan, with early payments largely consisting of interest payments.
  • Second homes and Rental Properties

    You can deduct the interest of home equity lines of credit involving second homes or rental properties if you meet one of two conditions: you live in the property for 14 days out of the year or 10 percent of the time that is rented out, or if you use your primary residence as collateral.
  • Warning

    Always consult a tax professional before taking out a home equity line of credit. Because tax statuses and situations vary widely, you may not be eligible for tax deductions or may be eligible for greater tax deductions. Many lenders will market HELOCs aggressively, touting the tax deductible nature of the interest. To make the smartest financial move for yourself, get advice from someone whose interests are more closely aligned with yours.
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