Are Home Equity Loans Tax Deductible?

Homeowners all over the country want to know if  home equity loans are tax deductible. The tax deductibility of HELOC and home equity loan interest has been a hot debate between loan officers, lenders and borrowers in recent years.

As house values rise, more and more consumers have started asking me questions about home equity loan tax deductions. As a homeowner, you probably know that the US government encourages you to buy a house of your own by allowing you to deduce mortgage interest off of your taxes up to a certain point on purchase, refinance and home equity loan transactions.

Is Home Equity Loan Interest Tax Deductible in 2025?

Now, let’s examine the tax deductibility of home equity loan interest paid in 2025. According to the Tax Cuts and Jobs Act, home equity loan interest is tax deductible through 2026.

What this means is that you can deduct your home equity loan interest if it meets the IRS guidelines, and you itemize your deductions.

In the past, this tax deduction allowed up to $100,000 per year, and generally helps homeowners to save at least a few hundred or thousands in taxes every year.

The IRS limited people to the number of homes that are eligible for this tax deduction.

That is, you can deduct your mortgage interest on your personal residence where you live most of the time, and one other home that might be your second home.

The IRS allows you to deduct mortgage interest on a first mortgage but no longer can people deduct their home equity loan interest for anything they want.

Being able to do this is a major advantage of home ownership. Many homeowners cherish the ability to have their home equity loan interest be tax deductible, but this all changed in 2018. The IRS allows homeowners to write off the interest on a home equity loan if they are using the money to make home improvements. Learn more about the TCJA. For decades homeowners have been cherishing the home equity loan tax deduction.

• Research the Limits of Writing-Off Home Equity Loan Interest.

• Maximize Financial Benefits of Homeownership with Tax Deductible Home Equity Loans.

• Speak with Home Equity Lenders and Financial Advisers that Understand the Current Tax Laws.

When you take out a 2nd mortgage and tap your home equity, your interest payments could qualify for an additional deduction, in addition to your mortgage interest. To qualify for a home equity loan tax deduction, it only needs to have been obtained after October 1987. The home equity loan must be secured by your home. The interest on a home equity line was also deductible in most instances before the Congress passed the tax reform bill in December of 2017.

The IRS states that for tax purposes, the balance of the loan that is the smaller of $100,000 or the amount of equity in the home will qualify for the deduction. Equity that you have is the amount you can sell the home for (current market value) minus what you owe on the mortgage.

Each year, you will need to report your home equity loan interest on your IRS Tax Schedule A. You can add this interest to the other mortgage interest that you are paying. If your total itemized deductions are more than the standard deduction that the IRS gives you, you will usually save plenty of money by deducting mortgage interest.

Note that the ability to deduct mortgage interest does have limits. You only take advantage of the home equity loan tax deduction on a main or a second home, and the limit each year is $100,000. Interest on a home acquisition loan as high as $1 million also may be deducted. You get a home acquisition loan to build, buy or improve a home.

Make sure you follow the IRS code for Tax Deductions for interest paid on home equity loans.

This means that you can deduct mortgage interest on a total of $1.1 million home loans every year. If you have another home, such as a second home or vacation home, the limit applies to the total amount of debt for both homes. If your second mortgage loans are above that limit, you cannot tax deduct that interest.

Overall, taking out a home equity loan, if done for the right reasons, offers excellent tax advantages that can save you money every April at tax time. Keep in mind that you cannot deduct interest on personal loans or credit cards, so using your home’s equity for essential needs can be a good move that saves you long term.

What Closing Costs Are Tax Deductible on a Home Equity Loan or HELOC in 2025?

Taking out a mortgage always has costs, and a home equity loan or HELOC is no exception. While the closing costs for second mortgages are usually lower than for first mortgages, you still will need to pay a few thousand dollars to close the loan. But when it comes to your taxes, can you tax deduct any of the closing costs for an equity loan or home equity line of credit?

Generally, you cannot deduct closing costs on a second mortgage on your taxes because many of the closing costs that you CAN deduct are for first mortgages only. For example, if you pay points on a mortgage refinance to lower the interest rate, you may be able to deduct the points if the cash is used for capital improvements on your home. But as you don’t pay points on second mortgages, this tax break doesn’t apply.

However, if you use the equity for capital improvements, you can probably deduct the interest off your taxes.

For instance, if you take out $30,000 and redo the kitchen, you should be able to deduct the interest on your taxes. But if the $30,000 is used to pay down credit card debt, you cannot deduct the interest on your taxes.

If you have questions about tax deductions on a second mortgage or on its closing costs, talk to a CPA. Specific situations may be an exception to the rule, but generally, you can’t deduct second mortgage closing costs from your tax bill.

Homeowners often tap into their home equity through loans or lines of credit to fund various expenses, such as home improvements, education, or debt consolidation. Equity Loans and Home Equity Lines of Credit (HELOCs) are popular options for accessing this equity. One critical aspect that homeowners need to consider is the tax implications of these financial instruments. In this article, we’ll explore whether Equity Loans and HELOCs are tax deductible in the United States.

Tax Deductibility of Home Equity Loan Interest

In the past, interest paid on Home Equity Loans was often tax deductible. Under the Tax Cuts and Jobs Act (TCJA) passed in December 2017, the deductibility of Home Equity Loan interest has changed. Here are the key points to consider with the home equity loan interest tax deductible objective:

1. Loan Purpose Matters: The primary factor that determines the tax deductibility of home equity loan interest is the purpose for which the funds are used. As per the TCJA, interest on Home Equity Loans is only tax deductible if the funds are used to “buy, build, or substantially improve” the home that secures the loan.
2. Dollar Limit: The interest deduction is subject to a dollar limit. Generally, you can deduct interest on Home Equity Loan debt up to $100,000 for individuals and up to $50,000 for married couples filing separately.
3. Combined Mortgage Debt: When calculating the limit, homeowners must consider their combined mortgage debt, including the original mortgage and the Home Equity Loan. If the total exceeds the threshold, the excess may not be tax deductible.
4. Alternative Use of Funds: If the Home Equity Loan funds are used for purposes other than improving the home (e.g., paying off credit card debt, funding vacations, or covering medical expenses), the interest is generally not tax deductible.  See the page that breaks down the HELOC vs Home Equity Loan features.

 Tax Deductibility of HELOC Interest

Like Home Equity Loans, the tax deductibility of HELOC interest is influenced by the purpose of the loan. Here’s what you need to know:

1. Qualified Home: To qualify for interest deduction, the home equity line of credit must be secured by a “qualified home.” This generally includes your main home and a second home, as long as they meet specific criteria. Is HELOC Interest Tax Deductible on Rental Property?
2. Loan Purpose: As with fixed loans, HELOC interest is deductible if the funds are used to “buy, build, or substantially improve” the qualified home. However, if the funds are used for other purposes, the interest may not be deductible.
3. Combined Limit: The interest deduction limit for HELOCs, when combined with the mortgage debt, is the same as for equity loans—up to $100,000 for individuals and up to $50,000 for married couples filing separately.

Recent Changes to Home Equity Tax Laws

It’s essential to be aware of recent tax law changes and how they impact the deductibility of Home Equity Loans and HELOCs:

1. TCJA Changes: The Tax Cuts and Jobs Act (TCJA) passed in 2017 introduced significant changes to the deductibility of home equity interest. Under the TCJA, some homeowners may find it less advantageous to deduct interest on these loans, especially if the funds are used for non-qualified purposes. The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the maximum amount of tax-deductible interest. If closed escrow on a HELOC or home equity loan before December 15, 2017, you could deduct interest on up to $1 million of debt if filing jointly and up to $500,000 of debt if filing separately. Since TCJA went into effect, joint filers who borrowed after that date can deduct interest on up to $750,000 of debt, and married people who file on their own can deduct home equity loan interest on up to $375,000 of debt.
2. Potential Future Changes: Tax laws can evolve over time. It’s crucial to stay informed about any potential changes in tax regulations that may affect the deductibility of Home Equity Loan and HELOC interest in the future.

Consultation with Tax Professionals on Home Equity Loan Deductibility

Given the complexities and changes in tax laws, it’s recommended for homeowners to consult with tax professionals or financial advisors to understand the specific tax implications of Home Equity Loan or HELOC interest. Tax professionals can help determine eligibility for interest deductions, provide guidance on proper documentation, and ensure IRS compliance with the latest tax regulations on home equity tax deductibility.

Home Equity Loans and HELOCs can provide homeowners with valuable financial flexibility to achieve various goals. However, the tax deductibility of the interest paid on these loans depends on several factors, including the purpose of the borrowing and the total mortgage debt. It’s crucial for homeowners to be aware of these tax implications and stay informed about changes in tax laws that may affect the deductibility of Home Equity Loan and HELOC interest.

As tax laws can be intricate and subject to change, seeking guidance from qualified tax professionals is the best approach to ensuring accurate tax reporting and optimizing your financial situation when using home equity borrowing options.

Other Advantages of Tax Deductible Home Equity Loans

An equity loan has other advantages besides being tax deductible interest. Here are some of the most popular other reasons that people get home equity loans:

Low interest rate on home equity loans: If you have any credit cards, you know that credit cards have interest rate as high as 25% in some cases. This makes any large purchases on credit cards become very expensive if you do not pay them off quickly. Your home equity loan is secured by your home, meaning that you lose the home if you do not pay. So, the bank is able to lend you money at a much lower rate. Check today’s home equity credit line rates. Just remember that interest rates change daily even on home equity loans and credit lines and you must first qualify with a licensed HELOC lender. Check the new home equity loan requirements.

Wipe out high interest debt: If you have $20,000 in credit card debt and are paying 18% interest per year, you can pay that off with a home equity loan at a rate of possibly 5% or so. This will result in a major savings each month. Note that the money loaned is secured by the property, so you have to pay the loan or you will lose the home.

Great to fund home improvements: If you want to revamp that kitchen and bathroom, you will be hard pressed to find lower interest money than an equity loan. Also, you can pay back the loan over many years, so it only will add a fairly small amount to your monthly payment in most cases. Over the years, people continue to use a HELOC because in most cases they can deduct the home equity interest.

Great to pay for college education: College loans usually have a higher interest rate than home equity loans, so borrowing money from your home to pay for someone’s college education can be a good bet. This makes even more sense if the person is going into a high paying field. Not sure whether to refinance your first mortgage or to take out a new equity loan, learn more about what is a tax deduction when doing a refinance mortgage.

Check home equity loan opportunities from seasoned lending specialists.

Home Equity Loans Are Considered 2^nd Mortgages

If you are refinancing credit card debt with a second mortgage, remember that you now are securing your debt with your home. If you don’t pay, you will lose your home and ruin your credit.

Some financial advisers do not recommend paying off credit card debt with home equity for this reason: It puts your home at risk.

We think there are cases where you can justify using home equity to pay off debt.

For example, you may have had a sudden medical expense or family emergency where you ran up $20,000 of high interest debt. If that debt was taken on for a legitimate reason and isn’t going to be repeated, using home equity may make sense.

However, if you are a serial shopper and routinely run up debt to buy things you don’t really need, paying off your credit cards with home equity could be dangerous. Are you just going to run out to the mall and run up the credit cards again? Now you have a second mortgage, PLUS new credit card debt. People who use home equity in such a case are often setting them up for a big fall.

Whether to use your home equity to pay off credit cards or not is a judgment call. You can save yourself a ton of interest, often 10% or more per year, plus you can write off the mortgage interest on your taxes. But people with spending problems who use home equity as a ‘way out’ often end up losing their homes in the end. So, choose wisely.

Bottom Line with Home Equity Loan Interest and Tax Deductions

Home equity loans have many financial, tax and other advantages. It is no wonder they are so popular today for people who need cash for big ticket expenses. Learning about HELOC and home equity loan tax deductions is a prudent move as it can equate to more money saved for you as a homeowner, but you have to know the facts.

When you are looking for a home equity loan, you always will be best off if you check several sources for mortgages. Some lenders will have lower home equity rates and fees than others. Don’t assume that your first mortgage holder is going to give you a better deal.

Breaking News on Home Equity Loan Interest Deductions

The new tax bill introduces several major changes to the tax code. For the first time in several decades, the interest deduction on home equity loans and HELOCs is no longer deductible for everything. Between the tax years 2018 and 2025, interest payments on funds borrowed through home equity loans or lines of credit, secured by your primary or secondary residence and used for the purposes of purchasing, constructing, or significantly enhancing the property, are recognized as home acquisition debt. These interest payments may be eligible for tax deductions, although specific dollar restrictions apply.

How the Tax Reform Bill Changes the Benefits of Home Equity Loans and HELOCs?

In the past, homeowners who borrowed against their home with a second mortgage or home equity loan were able to deduct the interest paid on the equity loan’s up to $100,000 when they filed their income taxes. Under the new tax reform bill, home equity loan interest deduction is gone. Technically, the law went into effect January 1, 2018, so 2017 was the last year that homeowners can write off  home equity loan interest for nearly any purpose. Every year Congress will review an vote on the home equity loan tax deductibility issue, so soon will see if 2025 will bless the homeowners with more home equity interest tax deductions. Read more about tax laws and deductions for homeowners from the IRS.

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