What to know about home equity tax deductions now
Home equity loans and home equity lines of credit (HELOCs) have multiple advantages for homeowners. Since home values are high now, the average homeowner has over $300,000 worth of equity to borrow from with either product, easily surpassing the amount of money typically available with credit cards and personal loans. And interest rates on both products have been steadily declining for more than a year now, with average rates under 8.50% for both, making them many percentage points lower than credit cards and personal loans. Additionally, both home equity loans and HELOCs have unique tax advantages that alternatives simply do not, making them even more cost-effective when borrowers look beyond the lower interest rate.
So, this April, existing home equity borrowers may be well-served by remembering some important items about home equity borrowing and tax deductions. And prospective borrowers should also understand these items to better determine if a home equity loan or HELOC makes sense for their financial situation both now and into the future. Below, we'll detail three important things to know before filing your taxes, either this April or in the years to come.
Start by seeing how much home equity you'd be eligible to borrow here now.
What to know about home equity tax deductions now
Here are three important items to remember when reviewing your taxes for qualifying home equity deductions this year:
The interest is deductible for eligible home projects only
A home equity loan or HELOC isn't deductible simply because it was secured in the specific tax year. The funds will need to have been used for eligible home repairs and projects to qualify. That means projects like kitchen renovations, bathroom remodels and possibly new rooms or floors added to the home. But consolidating your high-rate credit card debt? Or using it to pay for a wedding or college tuition? Those uses won't qualify, so be careful in your approach (and what you use to justify a tax deduction).
"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 IRS notes online. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
Learn more about home equity loan tax deductions here.
It will only apply to HELOC money used, not HELOC money approved
HELOCs are tax-deductible for the same uses as home equity loans are. But because HELOCs work as a revolving line of credit and home equity loans are delivered via one lump sum, it's important to understand the nuances in regard to tax deductions. With a home equity loan, repayments will begin right away, so your tax deduction eligibility will begin right away, too (assuming the funds are used for the aforementioned projects). A HELOC, however, will be a bit different. The tax deduction benefit will only apply to HELOC money utilized, not the line of credit approved.
In other words, say you secured a $20,000 HELOC but didn't use the line of credit in the relative tax year. Then you won't secure the tax deduction. But if you used $10,000 from the HELOC (again, for the aforementioned projects), then that $10,000 amount only could qualify to be deducted. It's an important nuance that needs to be understood so be sure to review it carefully with your financial advisor or accountant so that you're positioned to secure the right tax deduction.
It's an ongoing tax benefit
One of the major benefits of home equity loan and HELOC tax deductions is that it's an ongoing benefit. Barring any changes via the IRS, if you've already used your home equity loan or HELOC for qualifying projects in the opening months of 2025 then you'll be eligible for additional tax deductions when you file your next tax return in 2026 and so on. Not only does this help reduce your tax bill each year, but it also helps reduce concerns over changing interest rates on home equity loans and HELOCs by knowing that the interest you pay now could be deducted from your following tax return anyway.
The bottom line
Tax filing season can be stressful, particularly if you waited until April to get your taxes completed. So, it may be tempting to rush to file. But home equity borrowers, whether they used a home equity loan or HELOC, have potentially valuable tax deductions to explore before submitting their return. So take the time to understand the aforementioned features. By familiarizing yourself with these nuances you can potentially lower your tax bill for the past year and for years to come, as well.
