Is Interest Paid on a Home Equity Loan Tax Deductible?
AInvestThursday, Jan 2, 2025 3:14 pm ET
5min read



The Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the tax landscape for homeowners, particularly regarding the deductibility of interest paid on home equity loans. Before the TCJA, interest on home equity loans and lines of credit (HELOCs) was generally deductible, regardless of how the loan proceeds were used. However, the TCJA introduced new rules that limit the deductibility of home equity loan interest.

Under the TCJA, interest on home equity debt is tax deductible if the funds are used to "buy, build, or substantially improve" the residence that secures the loan. This means that if you use a home equity loan to pay for personal expenses, such as credit card debt or college costs, the interest is not deductible. Additionally, the TCJA reduced the cap on mortgage interest deductions, which also impacts the deductibility of home equity loan interest.

The TCJA reduced the limit on mortgage interest deductions for new loans taken out after December 15, 2017. The new cap is $750,000 for married couples filing jointly and $375,000 for married couples filing separately. This cap applies to the combined total of mortgage debt and home equity debt (HELOCs and home equity loans). This means that if you have a mortgage and a home equity loan, the total amount of debt cannot exceed the cap to qualify for the full deduction.

For example, let's say a married couple takes out a $500,000 mortgage to purchase a home in 2022. In 2023, they take out a $200,000 home equity loan to build an addition to their home. The total loan amount is $700,000, which is below the $750,000 cap. Since the home equity loan was used to substantially improve the home, the interest paid on both the mortgage and the home equity loan is deductible.

It's important to note that the TCJA's cap does not apply to mortgages taken out before December 15, 2017. These older mortgages are still subject to the previous $1 million limit (or $500,000 for married couples filing separately). However, if you refinance an older mortgage, the new loan amount cannot exceed the original mortgage amount without losing the grandfathered status.

In conclusion, the TCJA's changes to the tax deductibility of home equity loan interest have made it more important for homeowners to understand the new rules and how they apply to their specific situation. If you have questions about the deductibility of your home equity loan interest, it's a good idea to consult with a tax professional to ensure that you are taking advantage of all available deductions and avoiding any potential pitfalls.

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