Home Equity Loan Tax Deductions Explained

Home Equity Loan Tax Deductions Explained

Having access to affordable credit can help you with a variety of expenses. Nowadays, people are increasingly turning to home equity loans as a source of credit to finance a variety of things, such as home improvements or debt consolidation. What’s even better is that these loans may be tax-deductible. This article is here to clarify the details and help explain how home equity loan tax deductions work.

What Is A Home Equity Loan?

A home equity loan is a loan secured by the equity in your home. Equity is the difference between the value of your home and the amount still owed on your mortgage. A home equity loan can provide you with extra cash when you need additional funds. It typically has a fixed interest rate and a fixed payment schedule.

Understand How Home Equity Loan Tax Deductions Work

The 2017 Tax Cuts and Jobs Act (TCJA) introduced some substantial changes to how you can deduct the interest of your home equity loan from your taxes.

To qualify for a home equity loan deduction, you must use the loan for a “qualified purpose.” This includes expenses like home improvements or purchasing a car. The loan must also be secured by a qualified home-secured loan, such as a first or second mortgage, or a home equity loan.

Under the TCJA, you can only claim a home equity loan deduction on loan amounts up to $750,000 (or $375,000 if you’re married and file separately). Any amount of debt beyond $750,000 isn’t eligible for the deduction.

Keep in Mind These Home Equity Loan Tax Deductions Rules

In addition to using the loan proceeds for a qualified purpose and staying within the loan limits, there are a few other rules you should keep in mind if you plan on taking advantage of home equity loan tax deductions:

• Both primary and vacation homes are eligible for the deduction.

• If you take out a line of credit, the interest is still deductible; the same goes for a home equity loan with a variable interest rate.

• Any amounts of home equity debt above the $750,000 limit are still deductible, but under the category “excessive debt.”

• You are limited to deducting up to $2,500 in home equity loan interest per filing year.

How to Claim the Deduction

When it comes time to file your taxes, take advantage of the “home mortgage interest” deduction form to apply for your potential home equity loan tax deduction. When you’re done, you’ll itemize your deductions to ensure that your loan qualifies.

Home equity loans can be an incredibly beneficial option for those looking for financing for a variety of projects. While the 2017 Tax Cuts and Jobs Act changed the rules for how home equity loan tax deductions work, there are still a number of ways for you to take advantage of your possible tax savings. Just be sure that you understand the rules, understand how much you can deduct, and make sure to itemize your deductions.

By taking time to understand home equity loan tax deductions, you can determine if they’re right for you, and save money in the process.

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