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HELOC interest and taxes, in plain terms

Interest on a home equity line is deductible in some situations and not in others, and the difference is what you spend the money on. The outline, without the advice.

01The rule, roughly

Under current federal rules, interest on a home equity line is deductible only when the money is used to buy, build, or substantially improve the home that secures the line. A new roof, an addition, a kitchen down to the studs: generally yes. Paying off cards, buying a car, tuition, a down payment on a different property: generally no, even though the loan is secured by the house.

There is also a ceiling. The deduction applies to interest on total home acquisition debt up to $750,000 for most people filing after 2017, counting the first mortgage and the line together. Older mortgages can fall under a higher limit.

02It only matters if you itemize

The deduction reduces taxable income only for people who itemize instead of taking the standard deduction. With the standard deduction where it has been in recent years, most households do not itemize, and for them the interest changes nothing on the return. If you are close to the line, interest on a large improvement draw can tip you over.

03Mixed use and paperwork

A line used partly for a renovation and partly for other things is split. The share of interest tied to the improvement may qualify; the rest does not. Keeping receipts and a simple log of what each draw paid for makes that split defensible. The lender sends a Form 1098 each year with the total interest, and it is on you to work out which part counts.

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Related

  1. Home equity line of credit: the full guideWhat a HELOC is, who gets one, how the process runs week by week, what it costs, and where it loses to the other ways of getting money out of a house.
  2. Home equity investments and taxes, in plain termsThe cash you receive is generally not treated as income, and the settlement years later can change your gain when you sell. The outline, without the advice.
  3. Taxes when you sell, in plain termsMost people who sell the house they live in owe no federal tax on the gain, up to a limit. Here is the shape of the rule, what basis means, and how inherited houses differ. The outline, without the advice.

This path, in order

Home equity line of credit: the full guide

  1. 01HELOC vs. home equity investment: which one costs you lessA HELOC is usually cheaper if you can carry a payment and your credit qualifies. A home equity investment costs more later and asks for no monthly payment.
  2. 02How much you can borrow on a HELOCLenders cap the line at a share of the home's value minus what you already owe. Here is the math, the ranges, and why the estimate and the final limit differ.
  3. 03How long a HELOC takes, and what slows it downOnline lenders can fund in about a week. Banks ordering a full appraisal often take 4 to 6 weeks. Here is what happens in each stretch and how to keep it moving.
  4. 04HELOC vs. cash-out refinance: which one to useA cash-out refinance replaces your whole mortgage at today's rate. A HELOC leaves it alone and adds a second loan. The first-mortgage rate usually decides it.
  5. 05HELOC interest and taxes, in plain termsYou are here
  6. 06Why your equity is a range and not a numberEquity is a modeled value minus a modeled lien. Both sides have error, so an honest number is a range, not a single dollar figure.