Is home equity loan interest tax deductible?

The interest on home equity loans cannot be deducted for tax purposes if the proceeds were not used to buy, build, or substantially improve your home.

This is true regardless of when the loan was taken.

How to claim home equity loan interest deduction

Higher standard deduction means fewer reasons to itemize

As of 2023, the standard deduction is $27,700 for married joint filers and $13,850 for singles.

For most people, the standard deduction gives a better break than if they itemize their deductions.

Rules on deducting home equity loan interest

If you take out a loan to serve multiple purposes, only the portion used for remodeling or upgrading your home can be deducted. So, for instance, if you paid for medical expenses or a cruise, you can no longer deduct the interest on that debt.

Maximum allowances for mortgage loan interest deductions

Beginning 2018, married couples filing jointly can only deduct home loan interest up to a new maximum allowance of $750,000 (previously $1 million). (Most mortgages fall under this threshold, but it’s important to note that the limit also includes the combined total of loans used to acquire, build or improve your main home and a second home.)

If you have been deducting interest on debt over $750,000 and your loan(s) came about on or before December 15, 2017, ‘grandfathering’ rules can apply.

Contact your tax professional about the specific details of your situation to determine how much debt qualifies for the interest deduction.

Limits on deductions from state and local property taxes

Starting with your 2018 return, you can no longer deduct more than $10,000 for state and local property taxes (SALT) combined.

Selling your home will be affected by updates to capital gains rules

The IRS grants an exclusion on real-estate capital gains up to $500,000 for married couples filing jointly, and $250,000 for singles (or couples filing separately).

However, you must have lived in the home for at least two of the last five years prior to its sale. For example, if you bought a home a few years back for $300,000 and sold it today for $900,000, you’d make a $600,000 profit.

If you’re married and filing jointly, as little as $100,000 of your profit in that example could be subject to tax.

Are private mortgage insurance (PMI) payments tax deductible?

Homeowners that did not pay 20% or more against their home’s mortgage will typically be required to pay for private mortgage insurance (PMI). This additional monthly PMI payment allowed to be fully tax deductible for homeowners under maximum gross income requirements. The deduction begins to phase out quickly with adjusted gross income (AGI) over $100,000 for married couples filing jointly and $50,000 for single filers at a rate of 10% for each $1,000 over the AGI limit. This means that the deduction is not available after an AGI of $109,000 for joint filers and $54,500 for single filers.

You may have heard that the law that allowed for this deduction expired in 2017. Thankfully, Congress re-introduced the deduction with the Further Consolidated Appropriations Act of 2020 and signed the legislation into law Dec 20, 2019 making this deduction available for eligible homeowners this year and retroactively to 2018.