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When you borrow on your home’s equity, there may be a bonus: The interest you pay each year is tax-deductible up to a government-imposed limit, as long as the borrowed money goes toward improving your home.
Claiming the deduction isn't difficult. To deduct the interest paid on your or on a home equity line of credit, known as a HELOC, you’ll need to at tax time using IRS Form 1040.
That’s worth doing only if your deductible expenses add up to more than the amount of the standard deduction for the 2020 tax year:
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The IRS allows interest deductions on up to $750,000 or $1 million in mortgage debt, depending on when the loan originated and whether you're filing with or separately from your spouse. That limit applies to the combined amount of all loans secured by a qualifying property — whether they are first (your primary mortgage) or second (home equity) mortgages.
For 2020, you can deduct the interest paid on home equity proceeds used only to “buy, build or substantially improve a taxpayer’s home that secures the loan,” the IRS says.
That rule went into effect for the 2018 tax year and was a big change from prior years, when you could deduct the interest regardless of what you used the money for.
are different products, but the interest deduction rules are the same.
With a home equity loan, you borrow a lump sum over a set period of time at a fixed interest rate. HELOCs are more flexible by comparison. After qualifying to borrow a certain amount, you can take out those funds at any time during the draw period, which usually lasts for 10 years. The interest rate on a HELOC is adjustable, or variable, and follows market rates.
Before tax time, you should receive an IRS Form 1098, or Mortgage Interest Statement, from your lender or lenders. It shows the interest you paid on your primary mortgage, home equity loan or HELOC in the previous year. You'll need this form if you want to deduct the interest on your home equity loan or line of credit. Call your lender if you don’t get a 1098 or if you want help in understanding it.