Is a HELOC Tax Deductible?

Is the interest  for a Home Equity Line of Credit Tax Deductible?

Like other forms of borrowing secured against your home, the interest on a Home Equity Line of Credit is tax deductible, however limits apply to the amount that can be deducted according to your situation.  Before we get too much further it's important to note that if you're ever looking to make decisions about your finances, and especially tax maters, you should discuss your situation with a qualified Tax accountant or advisor before making any final decisions.

When is Interest deductibe?

According to the IRS Mortgage interest deductibility guidelines, for interest on a loan to be tax deductible there are a number of factors that need to be considered: 

  1. The loan must be a Secured Debt against a Qualifying Home
  2. You must have an ownership interest in that Qualifying Home
The amount of interest that is deductible is then determined by:

  • When the loan was taken out
  • The purpose of the loan
  • The amount of the loan
We'll look at each of these factors separately in more detail below.

What is a Secured Debt for Tax Purposes? 

For the purpose of interest deductions, a loan must be a secured debt in order to be eligible.  A "Secured Debt" is a loan under which the borrower (you) gives the lender (the bank) a secured interest over a particular asset, in this case your home.  This secured interest is detailed in a mortgage note, deed of trust or other similar legally binding document, and provides the lender with rights in the event that you default on the repayments of your loan, or in the event that you sell the asset used as security.  Unlike an unsecured loan, a secured debt allows the lender to take action and ultimately sell the secuity if you default on the loan to satisfy the debt.  In order to be tax deductible, your loan must be a secured debt on a qualifying home.

 

Qualifying Homes explained. 

Second part of the eligibity criteria is that the loan must be secured against a "Qualifying Home". With regards to the interest deductibility of a home equity line of credit of credit or other mortgage loan, a Qualifying home is either:

  • Your Main home.  The home you live in most of the time.
  • A Second home that isn't rented out.  If you rent out your second home for part of the year and live in it part of the year, it may be considered a qualifying home, depending onn how much time you rent it as opposed to live in it.  Check with your financial advisor ot tax accountant if you have a dual use second home.
If you use your home for anything other than just living in, such as operating a business from your home, this can affect how much interest you can deduct.  Likewise, if you have more than one second home you can choose which home you consider to be your second home for the purposes of tax deductions, and change this over time.  In both cases you should discuss your personal situation with a tax advisor before making any decisions as these situations can become very complex and professional advice is recommended.  For most people however, their main home will be the secuirt used for their HELOC.

How much Interest is deductible?

Provided that your loan meets the above criteria of being a Secured Debt against a Qualifying Home, some or all of the interest on your loan may be tax deductible.  How much is deductible depends on when the loan was taken out, how big it is and what the money is used for.

For most people the intereston their HELOC will be full deductible but this is not necessarily the case.  Your Interest will be fully deductible if:

  • Your total mortgages including the Home Equity Line of Credit do not exceed $100,000 ($50,000 if married and filing taxes separately) for the entireity of the year.
  • Your total mortgages, including the Heloc are less than $1,000,000 (half that if married and filing separately), AND were taken out after October 13 1987 to buy, build or improve the Qualifying Home.
If these scenarios do not apply to you then some or all of the interest may not be deductible and you will need to seek professional advice to determine your corrent deductions.