Mortgage / Equity

Home Equity
Home Equity Line of Credit Tax Deductible

Is a home equity line of credit tax deductible? The answer to this question is no but the interest on a home equity line of credit might be tax deductible.

The home equity line of credit itself is not tax deductible. In some cases; however, it is possible for some homeowners to deduct all or part of the interest on a home equity line of credit from their taxes. This means that some homeowners will be able to save money on their taxes by using a home equity line of credit (HELOC) to pay off debts with taxable interest.

The tax law on home equity lines of credit is pretty convoluted so it is next to impossible for an average person to determine if their HELOC interest is tax deductible or not. Most people will end up having to consult a tax preparer such as an accountant or a tax attorney to see if they can deduct their interest.

Most home equity line of credit agreements recommend that homeowners consult a tax advisor. This is good advice when you get a HELOC. Claiming a deduction you’re not eligible for can lead to a tax audit by the IRS.

What Interest is Tax Deductible

Most home mortgage interest is tax deductible for most homeowners in the United States. Most mortgage insurance payments are also tax deductible in the US. Since a HELOC is not a mortgage it is not covered by these provisions of the tax code.

The interest on a HELOC might be tax deductible if it is used for purposes that are tax deductible. For example a HELOC used to finance remodeling designed to make the home more energy efficient or a line of credit used to finance repairs or improvements on a rental property.

It might also be possible to write HELOC interest off if a HELOC is taken out to make repairs to a home that is damaged in a natural disaster or an accident. This could be considered a loss which is tax deductible.

In states where there is a state income tax, the HELOC interest could be tax deductible.  A homeowner would have to check with their tax provider or the state government to learn if HELOC interest is taxable under their state income tax laws.

Taking Advantage of HELOC Deductions

If the interest on your home equity line of credit is tax deductible it might make sense to use it to pay off loans with taxable interest. The interest on many kinds of consumer loans including credit cards, car loans and payday loans is not tax deductible.

By using a HELOC to pay off such loans a person can shift their credit to one with interest they can deduct. This can help a person reduce their tax burden by several hundred dollars a year.

Before taking this step a homeowner should compare the HELOC interest to the interest on the other loans. If the HELOC interest is higher any money they save in deductions could be eaten up by the higher interest.