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Are HELOC and home equity loan interest tax-deductible?
If you’re a homeowner looking to use your residence as equity to finance a big project or pay off debt, you might consider getting a home equity loan or a home equity line of credit (HELOC).
And like every home-owning taxpayer, you might be wondering if you could use these loans as a tax deduction. This is where it gets a little bit complicated. Before the 2017 Tax Cuts and Jobs Act, home equity loan interest was tax-deductible, regardless of what it was used for.
The same applied to interest on a HELOC, which was also tax-deductible . Now, homeowners can only deduct this interest if it was used to renovate a home to increase its useful life. And it can only be claimed if taxpayers choose to itemize their deductions.
Key takeaways:
- HELOC interest and home equity loan interest is tax-deductible only if used to improve current residence
- This can only be claimed by itemizing deductions on Schedule A (Itemized Deductions) when filing your tax returns
Table of contents
What is the difference between a home equity loan and a HELOC?
If you decide to get a home equity loan (essentially a second mortgage), you’ll be able to borrow a lump sum amount and have a set deadline to repay it along with a fixed interest rate. With a HELOC, it’s more like getting a credit card with a high spending limit.
You can withdraw exactly the amount of money you need, when you need it. There’s no set deadline for its repayment and the interest rates usually change depending on the market rates.
If you’re self-employed and a homeowner, choosing the right type of loan depends on what you plan on using it for. A home equity loan might be a good option if you only need the interest amount to finish one big project like adding an extra room to your house.
But if you’re on a tight budget, HELOCs might be the better option. They are relatively cheap to get and you have the cash more readily available to you if you need it in case of an emergency.
Quick tip
Use a self-employment income tax calculator to get a full breakdown of your tax liability.
Is HELOC interest tax-deductible?
If you’re self-employed, you’re very familiar with writing off every possible business expense as a tax deduction to get your tax bill as low as possible. Using a 1099 tax calculator might be a good place to start if you need a little help on that front.
If you have a tax liability of over $1,000, you’ll have to pay estimated quarterly taxes to the IRS. You can use a quarterly tax calculator to make this easier. Sometimes, deadlines are forgotten or payments don’t arrive in time. In this case, you might have to pay some penalties. A tax penalty calculator can help total your owed penalty fees.
The interest on a HELOC is tax-deductible, provided it is used on any repairs or expenses that improve a taxpayer’s home. While the IRS doesn’t give an exhaustive list of all the qualifying expenses, there are a few common ones.
How to claim the home equity loan tax deduction?
So, are home equity loans tax-deductible? No, they aren’t, but the interest might be. Just like for a HELOC, home equity loan interest can be a tax deduction if used to improve or modify a home.
If you use the interest to pay off your student loans or pay for an expensive vacation, you won’t be able to claim the deduction. You also cannot claim the deduction if you’re using the interest on property that isn’t collateral for the home equity loan.
Claiming the home equity loan interest deduction is only possible if you choose to itemize your deductions. The same applies to the HELOC tax deduction as well. Because the IRS raised the standard deduction significantly for 2023, this deduction might not always be the best option.
If you are choosing to itemize your deductions, you will be required to fill out Schedule A and attach it to Form 1040 when you file. You will use the information from Form 1098 (Mortgage Interest Statement) to do this.
If you’re choosing to claim the itemized deduction, just make sure you have a record of all your home improvement and repair expenses in the form of receipts and invoices, in case you get audited by the IRS. Keeping track of your expenses is also necessary if you pay self-employed taxes.
To make this easier, you can just link your expenses to FlyFin and let A.I. effortlessly find every tax write-off to lower your self-employment tax bill. And that’s not all. CPAs who are experts in 1099 taxes are available 24/7 on the app to answer questions and can even prepare and file your tax returns.
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