Similar to home equity loans, home equity lines of credit (HELOCs) act as second mortgages and allow you to access cash by pulling equity out of your home. You’ve also heard about tax benefits that come with HELOCs but aren’t sure how they work. This guide dives into the ways in which you can use the funds from a HELOC to get a break at tax time and where to find a reputable lender who offers this debt product.
In Which Case Is the Interest of a HELOC Tax Deductible?
You can deduct the interest paid on a home equity line of credit (HELOC) if the funds you borrow are used to make improvements or upgrades that significantly improve the home’s value. However, the property must also be used as security for the HELOC.
Rules for HELOC Interest Tax Deductions
To qualify for the HELOC interest deduction, you must meet the following eligibility criteria:
- Have a home mortgage that you secured after October 13, 1987
- Use the property as your main home or second home – the latter only qualifies if you occupy it for more than 14 days or use it as a rental and live there for more than 10 percent of the time it’s rented out
- Owe no more than $750,000 (or $375,000 if you’re married filing separately) on your home loan; this amount increases to no more than $1 million (or $500,000 if married filing separately) if the home loan was acquired before December 15, 2017
How Much HELOC Interest is Tax Deductible?
The HELOC interest deduction only makes sense if you itemize deductions on your 1040 and the total amount exceeds the standard deduction. Below are the standard deduction amounts for the 2021 tax year listed by filing status:
- Single or married filing separately: $12,550
- Head of household: $18,000
- Married filing jointly (married couples): $25,100
To illustrate, assume you paid $8,500 in interest on your first mortgage and $1,500 on your HELOC. Regardless of your filing status, you’d be better off taking the standard deduction since the total interest paid is only $10,000. But if your interest payments on your primary mortgage and HELOC were $10,000 and $3,500, it would be more sensible to itemize deductions since this amount exceeds the standard deduction.
Remember, interest is only deductible on up to $750,000 of home loan balances ($375,000 for taxpayers who are married filing separately) or $1 million ($500,000 for taxpayers who are married filing separately) for homes purchased prior to December 15, 2017.
Limitations for HELOC Interest Tax Deductions
Installing a new HVAC system, renovating your bathroom, adding an additional bedroom or upgrading your kitchen would all be deemed qualifying improvements. However, paying off credit card debt, covering medical expenses or taking a luxurious vacation wouldn’t be qualifying expenses per the IRS, and the interest on the HELOC wouldn’t be tax deductible.
Also, be mindful that the home renovations must be made on the property the HELOC uses as security to qualify for the HELOC interest tax deduction. This means you can’t take out a HELOC on your primary residence and use it to renovate a property only used as a rental in another state.
Documentation Needed to Claim Your HELOC Interest Tax Deductions
Form 1098: Mortgage Interest Statement
You should get a copy of “Form 1098: Mortgage Interest Statement” in the mail from your lenders by January 31st for the previous tax year. Look for the amount of interest you paid on your primary mortgage and HELOC, and include these amounts on “Schedule A: Itemized Deductions” when filing your return.
Be sure to keep copies of your 1098 forms just in case the IRS decides to audit you in the future. It’s equally important to retain receipts for any purchases you make using the funds to provide proof of how the money was spent.
Copy of Your Closing Disclosure and HELOC Loan Application
These documents should also be kept in a safe place just in case you need to reference them at tax time. And if you’re audited, the IRS will also want to take a look.
Where Can You Get a HELOC?
Several banks, credit unions, and other financial institutions offer HELOCs nationwide. But with so many options to choose from, you want to find a lender that’s reputable and will put you first.
Spring EQ is a mortgage lender that checks both boxes – it’s accredited by the Better Business Bureau with an A+ rating, plus it provides exceptional customer service through a dedicated team of lending experts.
Even better, you may be able to access up to 95 percent of your home’s equity (capped at $500,000) with a HELOC from Spring EQ. You’ll also enjoy a streamlined digital lending process, fast funding times and flexible loan terms from five to 30 years. Homeowners also have the luxury of making interest-only payments for 10 years.
If a HELOC from Spring EQ sounds like it could work for you, visit the website and complete the online form to get pre-qualified today.