Interest paid on a home equity loan (HEL) will be tax deductible if several conditions required by the IRS are met. Taxpayers may use a home equity loan for a variety of needs and save money on their taxes year after year during the life of the loan by deducting their home equity loan interest.
What Conditions Allow Home Equity Loan Interest to Be Tax Deductible?
To start, in order for the interest to be deductible, the IRS requires that a taxpayer’s home equity loan must be secured, meaning that a signed financial document identifies the home as collateral against the loan. The home itself must also be qualified. That is, it must be the taxpayer’s primary or secondary residence in addition to other factors. Mortgage interest for unimproved land, rental property, additional secondary homes and business property may not qualify for this tax deduction.
What are the Limitations to the Uses of a Home Equity Loan when Taking a Tax Deduction?
The home equity loan can be used for any purpose the taxpayer chooses, not confined to home improvements. In fact, HELs are commonly used for credit consolidation, major purchases, college tuition, medical expenses and investment. Because the HEL is secured by the home, the interest rate for an HEL may be lower than unsecured credit card interest, student loan interest or personal loan interest.
How is the Home Equity Loan Interest Tax Deduction Reported?
Qualified home equity loan interest is reported as an itemized deduction on IRS Tax Schedule A (Form 1040). This can be in addition to other eligible mortgage interest or points. If total itemized deductions are greater than the standard deduction, the taxpayer generally saves money by using the itemized deduction.
More complex home loan situations may require additional tax calculations. Discover Home Equity Loans recommends that you consult a tax advisor to fully discuss your options and ensure you get the most out of your deductions.