The deadline for filing your 2022 taxes is just weeks away (April 18, to be exact). While many people can get their taxes done early by using an online tax preparation service, other people may not even know where to begin. It can quickly become confusing trying to determine what tax bracket you’re in and what deductions you are and aren’t eligible to take.
Homeowners can generally depend on a sizable deduction if they’re still paying significant interest on their home loan. But if they’ve been in the home for an extended period of time – and the interest on the loan has dropped – they may not be able to deduct much when it comes time to file their return.
Fortunately, there is another way homeowners can take advantage of tax deductions. If the homeowner used a home equity line of credit (HELOC) or a home equity loan during the tax year in question they may be able to deduct the interest they paid on their return. This can only happen in IRS-approved circumstances but it’s still worth pursuing, particularly if you took out a substantial amount of equity during the year in question.
Learn more about how a home equity loan can qualify as a tax deduction and why this type of credit may be worth it for some homeowners from a trusted expert. Start exploring your home equity loan options here and check your eligibility.
Is a home equity loan tax deductible?
In short: A home equity loan isn’t tax deductible but the interest the homeowner paid on it may be if they used it for IRS-approved reasons.
“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 explains online. “The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.
“Generally, you can deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a,” the IRS says. “However, any interest showing in box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by the property, is not deductible if the proceeds were not used to buy, build, or substantially improve a qualified home.”
Not sure if you’d qualify? Online tax services can help you sort through your return to help maximize your deductions.
You can explore your local home equity loan options online now.
Home equity loans are just one (important) item you can deduct when filing your taxes. If you used a HELOC you may be eligible for a deduction there, too, assuming it met the same requirements your home equity loan did. And the mortgage interest deduction is still a substantial one for millions of homeowners.
“You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness,” the IRS says. “However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.”
And don’t forget, while the tax deductions for home equity loans and HELOCs are favorable, you’re still using your home as collateral for this sort of credit. So make sure that you’ve explored all of your credit options thoroughly before signing on the dotted line. That said, both home equity loans and HELOCs generally offer lower interest rates than many other popular forms of credit so the rate – combined with its interest deduction – may make these credit options your best bet.
Have more questions about home equity loans? Not sure if they’re right for you? Learn more about this unique credit option by checking out these articles:
Source : https://www.cbsnews.com/news/is-home-equity-loan-tax-deductible/