Is Home Equity Loan Interest Tax Deductible in California?
If you’re a homeowner in California with equity in your home, a home equity loan may allow you to deduct the interest paid on the loan when you use the funds to improve your home1.
When trying to deduct your home equity loan interest charges, you will need to provide receipts and documentation that prove that the funds from your home equity loan were used to pay for your home improvements.
When is Home Equity Loan Interest Deductible in California?
While you can use a home equity loan for many purposes, you’ll generally only be able to deduct interest on it if you use it for home improvement-related expenses2. These types of expenses may include remodeling your kitchen or bathroom, replacing your roof or siding, adding an addition, or finishing your basement3. Unfortunately, furniture and home decor are not eligible for this mortgage interest credit in California3.
According to the Tax Cuts and Jobs Act of 2017, taxpayers may deduct up to $750,000 in home loan interest for homes purchased as of December 16th, 2017. If you purchased your home before that date, you are eligible to deduct up to $1 million in principal mortgage interest1.
Although it’s common for homeowners to use home equity loans to improve their homes, it’s just as common for them to use them for other purposes
It’s important to note that the $750,000 limit applies to your total debt on all the properties you own3. So, if you owe $400,000 on your primary home in San Francisco and owe $350,000 on a vacation home in Los Angeles, you may get a property tax deduction in California on the entire amount.
However, if your primary home is $750,000 and your vacation home is $350,000, the tax break will only be applicable on $750,000. In this example, you wouldn’t be able to get a California property tax deduction on your vacation home.
If you’re single, you’re in luck, because two singles may deduct a total of $1.5 million in mortgage debt ($750,000 each) if they purchased a home together. Unfortunately, your limit will be $750,000 if you’re married4.
When is Home Equity Loan Interest Non-Deductible in California?
Although it’s common for homeowners to use home equity loans to improve their homes, it’s just as common for them to use them for other purposes. These other purposes may include consolidating high-interest credit card debt, funding a child’s college education, or even going on vacation.
If you take out a home equity loan and use it for a purpose unrelated to home expense, you won’t be able to deduct the interest. Here’s why: The Tax Cuts and Jobs Act of 2017 states that interest deductions are not permitted on home equity loans for tax years 2018 to 2026, unless the funds are used to purchase, build, or substantially improve your primary or second home2.
While it’s acceptable to take out a home equity loan to pay for lifestyle expenses, education costs, and big ticket purchases, just keep in mind that if you go this route, this won’t be eligible for a loan interest tax deduction in California.
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