Are Home Equity Lines of Credit Tax Deductible?

By Anton Behr

  • Overview

    As a measure to promote home ownership and responsible investing, the federal government provides several special tax deductions for home owners. One such tax deduction that homeowners enjoy involves home equity lines of credit (HELOC). Read on to learn about tax deductible home equity lines of credit.
  • What is a Home Equity Line of Credit?

    A home equity line of credit is a line of credit that uses the borrower's home as collateral. It is similar to a loan, however, instead of getting a lump sum the borrower is able to withdraw a number of smaller amounts over a period up a time that total the amount of the HELOC borrowed. A HELOC allows the borrower to borrow more than they would be allowed to access on an unsecured line of credit, since the use of the house as collateral lowers the lender's risk. The interest rates on HELOCs are also lower than most other loans for the same reason.
  • Deductibility

    In the eyes of the IRS, a home equity line of credit is treated similarly to a mortgage. The portion of repayments on mortgages that goes towards paying down the interest of your loan is tax deductible. Your bank or lender will provide you with a receipt for each payment made as well as a repayment schedule that will break down your payments in terms of interest and principle payments. Typically, the bulk of your first few payments will go towards the interest on your loan.

  • Amount

    How much you can deduct depends on what you use the money for. If you are applying the money towards an improvement on your home, you can deduct the interest of a home equity loan up to $1 million. For all other expenditures (for example, to pay for college or consolidate other debt) you can deduct the interest of a HELOC up to $100,000. Note that if you are married, filing separate, each spouse can deduct half of the total amount.
  • Which Form?

    To apply for a tax deduction for a home equity line of credit the borrower must fill out Form 1040, Schedule A. When filing this form out, you must do so as an itemized deduction.
  • Considerations

    Always consult your tax professional when considering taking out a home equity line of credit. While conventional wisdom dictates that a HELOC is always an astute financial maneuver, there are many special situations in which a HELOC may not be beneficial for you. For example, your lender may charge you penalties for late fees or early repayment. These fees are deductible only if they were "not for a specific service in connection with your mortgage loan," according to the IRS. If you prepay your interest that is due beyond the year it is due, you must spread the deduction over the applicable year. For example, if you prepay your interest payment for January 2010 in December 2009, you must deduct the payment from your 2010 taxes, rather than your 2009 taxes. You can not deduct the interest from your HELOC if you use it to invest in tax-exempt securities or certificates that produce tax-free income.
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