Is home equity loan interest tax deductible?

With certain provisions included in the TCJA set to expire at the end of 2025 unless a new law is passed, these guidelines for claiming a tax deduction on home equity loan interest apply to loans taken out between 2018 and 2025.

How to claim the home equity loan interest deduction

First things first, you will need to make sure that you qualify for the deduction – meaning your home equity loan funds were used to “buy, build, or substantially improve” the home that secures the loan. Once you’ve got that covered, it’s time to roll up your sleeves and get your paperwork in order.

To claim the home equity loan interest deduction, you’ll need to itemize your deductions. It may not be the most exciting task, but it may be worth it in the end. You will have to decide whether itemizing will provide a greater tax benefit than the standard deduction. If it does, then go for it!

Higher standard deduction means fewer reasons to itemize

For 2024, the standard deduction is $29,200 for married joint filers and $14,600 for unmarried individuals or married couples filing separately. When tax time comes around, many people will find that the standard deduction gives a better break than if they itemize their deductions. However, you should consult with a tax professional to help determine which path is best for your situation.

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 cannot deduct the interest on that debt.

Maximum allowances for mortgage loan interest deductions

Beginning in 2018, married couples filing jointly may 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 home.

If you have been deducting interest on debt over $750,000 and your loan(s) were taken out on or before December 15, 2017, ‘grandfathering’ rules may apply. According to the TCJA, taxpayers with mortgages taken out on or before this date may be eligible to deduct interest on up to $1 million of combined mortgage debt. However, mortgage funds still must be used in a way that’s related to the property that secures the loan. Contact a tax professional about the specific details of your situation to determine how much of your mortgage debt may qualify for the interest deduction.

LEARN MORE: Is home equity line of credit (HELOC) interest tax deductible?

Limits on deductions from state and local property taxes

In accordance with section 11042 of the TCJA and starting with 2018 tax returns, you can no longer deduct more than $10,000 for state and local property taxes (SALT) combined.

Selling your home may be affected by 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.