Is a Home Equity Line of Credit Tax Deductible?

The tax implications of a Home Equity Line of Credit (HELOC) have evolved over the years, and understanding them can be quite complex. In this guide, we will explore the current rules and conditions under which a HELOC's interest might be tax-deductible.

Changes to the Rules

One of the significant changes to the rules regarding HELOCs occurred in 2018. Previously, there were no restrictions on the purpose of the funds used through a HELOC. However, the Tax Cuts and Jobs Act (TCJA) effectively placed limitations on the use of HELOC proceeds for tax-deductible purposes. Specifically, unless the funds are used for home improvements or to purchase the home, the interest on the HELOC may not be deductible.

Tax Deduction Eligibility for 2020 Federal Return

As of 2020, the interest paid on a home equity loan is deductible, but there are limits to consider. The total amount of all home loans for which interest is deductible cannot exceed $750,000 for married filing jointly or surviving spouses, and $375,000 for single filers. Additionally, the total allowed deduction for both property tax and mortgage interest plus HELOC interest paid cannot exceed $10,000.

An important point to note is that to claim these deductions, you must itemize your deductions on the tax return. If you take the standard deduction, you cannot itemize these allowable deductions.

Requirements for Tax Deductibility

To be eligible for a tax deduction on HELOC interest in the United States, the following conditions must be met:

Qualified Personal Residence: The HELOC must be secured against your qualified personal residence. It can only be used to finance improvements to that house, not for financing another house, such as a vacation home or a vehicle. Purpose of Funds: The funds must be used for home improvements or to purchase the home. If the borrowed funds are used for personal expenses unrelated to home improvements or purchases, the interest on the borrowed funds is generally not deductible. Loan Limitations: The amount of deductible interest is limited to the first $750,000 (or $1,000,000 if taken out before the TCJA became effective). This limit is based on when the HELOC was established.

Consulting a Tax Adviser

Given the complexity of these rules, it is highly recommended that you consult a tax adviser to ensure you are fully compliant with the current regulations and understand how these deductions apply to your specific situation.

Conclusion

Tax deductions for a HELOC depend on various factors such as the use of funds, the amount borrowed, and the nature of the residence. Always stay informed about any changes in tax laws and consult professional advice to navigate these regulations effectively.