Is a home equity line of credit tax-deductible?

Q: Is a home equity line of credit tax-deductible?

A:  One of the benefits of homeownership is the availability of a tax deduction for the interest paid on a mortgage. For interest paid on many home equity lines of credit (and home equity loans), 2017 was the last year that interest on a home equity loan or home equity line of credit was fully deductible without restriction.

Up to tax year 2017, interest on home equity loans or home equity lines of credit on amounts up to $100,000 ($50,000 if married filing separately) could be deducted, regardless of the purpose for which the borrower used the loan or line of credit.

Home equity loans and taxes

If you took out a home equity line of credit at the time you purchased your home in order to finance the acquisition of the property, such as an 80-10-10 loan with an 80-percent first mortgage, a 10-percent down payment and a 10-percent home equity loan, the second-lien mortgage is considered "home acquisition debt" by the IRS. For home acquisition debt incurred before December 14, 2017, interest incurred on amounts up to $1 million (married filing jointly) or $500,000 (singles or married filing separately) remains in place. However, for mortgage debt incurred after December 15, 2017, those amounts are reduced to $750,000 (married filing jointly) or $375,000 (single or filing separately).

Some home equity interest remains tax deductible, though. After December 15, 2017, for home equity interest to be eligible to be deducted, the IRS requires that the loan proceeds be used to "buy, build, or substantially improve a qualified home". So, if you took out your home equity line of credit (or loan) after December 15, 2017, and used the proceeds to make "substantial" home improvements and it is secured by a "qualified home" (which includes both primary residences and second homes). it is also considered home acquisition debt and is tax-deductible. If you're looking to deduct home equity interest from a "substantial" home improvement, you'll want to keep good records of the outlays in case of a future audit.

After the 2017 tax year, interest on home equity debt for purposes other than the "buy, build, or substantially improve" standard is no longer be deductible. There was also no "grandfathering" provision for existing loans and lines of credit, so 2017 was the last year for many homeowners to claim this kind of deduction.

IRS assistance

IRS Publication 936 addresses the topic of the tax deductibility of a home equity loan and a home equity line of credit with tables and examples that could apply to your personal situation. It also defines what qualifies as a "substantial" home improvement, and more. As well, it's always a good idea to consult with a tax professional to clarify the tax-deductible status of your home equity line of credit or loan.

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Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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