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If you took out a home equity loan to buy or improve your home last year, there’s good news: the interest you paid may be tax-deductible. However, the write-off benefit might not be worth it with the increase in standard deductions that kicked in last year.
We’ll help navigate the newest rules to help you decide if taking the home equity tax deduction makes sense.
Is home equity loan interest tax-deductible?
A home equity loan (HEL) offers more than the stability of a fixed rate and payment schedule; often, the mortgage interest is tax-deductible. The Tax Cuts and Jobs Act of 2017 included significant changes in federal tax law for the home equity interest deduction that remain until 2026.
Mortgage interest on a HEL may be deductible if:
- You used it to purchase, build or substantially improve your home.
- The loan amount is not more than $750,000 for a married couple filing jointly or $375,000 for individuals or married couples filing separately.
- The property is a primary home or a second (vacation) home.
One of the disadvantages of the tax law changes is home equity interest used for any reason other than home improvement is not deductible. If the money is used to pay off debt, take a vacation or buy a car, for example, the tax deduction can’t be applied.
Taking the home equity loan tax deduction in 2019
As you file taxes this year, make sure the deductible expenses are more than the increased standard deduction you’ll get. Otherwise, the home equity interest tax deduction doesn’t make sense.
The main factors affecting the home equity loan deduction for 2019 are:
- Standard deductions. The standard deduction rose to $12,200 for single filers and married couples filing separately, and $24,400 for married couples. The standard deduction for heads of households is $18,350.
- Proof of home improvements. Interest from a HEL used for home improvement can be deducted only if:
- The improvements add to the home’s value. A bedroom addition, new landscaping or updated kitchen are examples of acceptable projects. Basic maintenance and luxury upgrades aren’t eligible.
- The renovations extend your home’s life. Replacing a roof or upgrading an outdated electrical system will help keep your home in top shape.
- Repair costs must be documented. Keep invoices and receipts for all labor and materials from renovations. Your tax professional may need them.
- Maximum mortgage loan amounts. Mortgage interest is tax-deductible for home equity loan amounts up to $375,000 for single taxpayers and married couples filing separately and up to $750,000 for married couples filing jointly. This applies to homes bought after Dec. 15, 2017. While many homeowners aren’t affected by the mortgage interest limitation, those living in high-cost areas (parts of California or New York, for example) feel the biggest impact.
- Residency type. Home equity loan interest is only tax-deductible for a primary residence or second home. Rental properties don’t qualify for the home equity interest write-off.
- Alternative minimum tax (AMT) exemption changes. The AMT applies to higher-income taxpayers, but the new federal tax law makes it less likely you’ll pay it. If your income falls under the new limits for the alternative mortgage tax, you may not be able to deduct interest for your home equity loan. The 2019 AMT limits are $71,700 for an individual or married couple filing separately, and $111,700 for married couples who file jointly.
Documents you’ll need to deduct home equity loan interest
Before you do your taxes this year, make sure you have the following paperwork ready:
- Mortgage interest form (Form 1098). You’ll receive a 1098 mortgage interest statement from your current lender if you paid $600 or more in mortgage interest last year.
- Closing statement from purchase. If you used a HEL to purchase your home, your settlement statement will need to show the entire balance was used for the down payment.
- Receipts and invoices. If you qualify for home improvement deductions, provide copies of all of the invoices and receipts for labor and materials. You should also include a description of the types of improvements that were completed.
Other homeowner tax benefits
Besides writing off your home equity loan interest, make sure you take advantage of the other tax benefits of homeownership. You may be able to deduct the following items:
- Mortgage interest on your first mortgage. You’ll typically borrow more for your first mortgage than a HEL, which means more deductible interest. Each lender will send you a 1098 mortgage interest form reflecting the interest paid.
- Points. If you’re itemizing deductions, you can deduct points paid at closing to get a lower mortgage rate. You’ll need to provide a copy of your final closing disclosure to show how much you paid.
- Property taxes. In addition to mortgage interest limitations, the new tax laws set caps for deducting property taxes. Married couples filing jointly can write off up to $10,000 worth of property taxes (or $5,000 for individual filers or married couples filing separately).