Is HELOC Interest Tax Deductible?
HELOC interest is tax deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC)
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What Is A HELOC?
A Home Equity Line of Credit (HELOC) is a type of “revolving” credit that you can draw from and repay monthly, thus replenishing the credit line.
Credit cards are another type of revolving credit, but come with high interest rates that make it costly when large amounts of money are needed. A HELOC typically has a lower interest rate than credit cards and can be used for any type of purchase.
A HEOC is a “secured loan,” meaning that lenders require that the borrower put up security or collateral (in this case the borrower’s home) to secure the loan. Because your home is used as collateral, if you default on the loan, the lender can take possession of your home.
To learn more, read “What is a HELOC?
When Is Interest On A HELOC Tax Deductible?
According to the IRS
, interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
The loan must be secured by the tax-payer’s main home or second home (qualified residence), and not exceed the cost of the home and meet other requirements.
For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.
According to the IRS
, You can deduct your home mortgage interest only if your mortgage is a secured debt. Your mortgage is a secured debt (such as a HELOC) if you put your home up as collateral to protect the interests of the lender.
You can’t deduct home mortgage interest unless the following conditions are met
Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The loan must be secured by the tax-payer’s main home or second home
You may be able to deduct HELOC interest on your taxes if:
- All of your home mortgages taken out after October 13, 1987, are used to buy, build, or substantially improve the main home secured by that main home mortgage or used to buy, build, or substantially improve the second home secured by that second home mortgage, or both.
- Your (or your spouse’s if married filing a joint return) mortgage balances $750,000 or less ($375,000 or less if married filing separately) or $1 million or less ($500,000 if married filing separately) if all debt was incurred prior to December 16, 2017
(Please see your tax advisor regarding your personal situation.)
HELOC Deduction Limitations
Qualified mortgage interest includes interest and points you pay on a loan secured by your main home or a second home. Your main home is where you live most of the time, such as a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat. It must have sleeping, cooking, and toilet facilities.
You can also treat amounts you paid during the year for qualified mortgage insurance as qualified home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.
The IRS explains the limitation on home acquisition debt, as follows:
- “Home Acquisition Debt” is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home).
- It must also be secured by that home.
- If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that isn't more than the cost of the home plus substantial improvements qualifies as home acquisition debt.
- Home acquisition debt limit is the total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main home, and second home is limited based on when the debt is secured.
For debt secured after October 13, 1987, and prior to December 16, 2017, the limit is $1 million ($500,000 if married filing separately).
For debt secured after December 15, 2017, the limit is $750,000 ($375,000 if married filing separately). However, a tax-payer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, is considered to have incurred the home acquisition debt prior to December 16, 2017
What About Second Homes?
A second home can include any other residence you own and choose to treat as a second home. You don't have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or more than 10 percent of the number of days you rent it, for the interest to qualify as qualified residence interest.
As with the primary home, for interest to be deductible, the loan must be secured by the taxpayer’s main home or second home and not exceed the cost of the home.
What If I Purchased My Home Several Years Ago?
Qualified mortgage interest and points are generally reported to the homeowner by the mortgage holder to which you made the payments. You can deduct interest for the following types of mortgages:
- A mortgage you took out on or before October 13, 1987 (grandfathered debt).
- A mortgage taken out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt) but only if throughout the year these mortgages plus any grandfathered debt totaled $1 million or less. The limit is $500,000 if you're married filing separately. For homes acquired after December 15, 2017, the debt limitation is $750,000, or $375,000 if you're married filing separately.
Itemizing Your Deduction
To take advantage of the HELOC tax break, you will need to itemize your deductions.
- You can’t deduct home mortgage interest unless the following conditions are met.
- You file Form 1040 or 1040-SR and itemize deductions on Schedule A (Form 1040).
- The mortgage is a secured debt on a qualified home in which you have an ownership interest.
IRS requirements for the 2021 tax year the standard deductions are:
- $12,550 for singles or married couples filing separately.
- $25,100 for married filing jointly.
- $18,800 for head of household.
We always recommend speaking with your tax preparer or a tax professional regarding your unique circumstance in order to accurately determine whether you qualify for this and other tax benefits.
Example Of How You Can Deduct HELOC Interest
Let’s say you paid $2,000 in interest on a HELOC and $10,000 in interest on your mortgage in 2021. These itemized for a combined value of $12,000.
If you are single, it may not make sense to itemize to deduct the HELOC interest you paid, because the $12,000 in interest you paid is only slightly lower than the standard deduction of $12,550 for singles.
If you are married filing a joint return, the standard deduction is $25,100, so you may get a greater tax benefit from an itemized deduction vs. a standard deduction.
However, each individual’s situation is unique and you should speak with your tax preparer or a tax professional about your filing options.
Forms You'll Need To Claim A HELOC Deduction
Home mortgage interest is any interest you pay on a loan secured by your home, and can include your primary home or a second home.
To deduct home interest, you will need to file Form 1040
(for seniors age 65 and older), and itemize deductions on Schedule A (Form 1040).
CU SoCal HELOC
CU SoCal offers an interest-only HELOC, so you pay only the interest due each month, giving you the flexibility to keep payments low during the 10-year draw period of your loan. We offer the choice of either a lump-sum loan or a revolving credit line that can be used over and over again.
Other great HELOC features include:
- Access up to 80% of your home's equity.
- No points.
- No appraisal fees for single unit loans.
- No annual fee.
- No closing costs.
- Loan limit up to $250,000.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Apply for a HELOC today!
(The information in this article is not tax advice, and is for informational purposes only. Please see your tax advisors regarding your own personal situation.)
Get Started on Your Home Equity Line of Credit (HELOC)