Depending on how you used your home equity loan, you may be able to get a tax break for some or all of the interest you paid on it. The largest deductions are available for home improvements. But you can still deduct some of the interest on loans used to pay for college or to pay off other debts. And if you use the loan to make an investment, you can also write off the interest.
Home equity loans are used to make changes to a house.
The home acquisition debt deduction can be used to write off the interest on home equity loans used to build or improve a first or second home. It has the highest limits, at a million dollars. The home equity debt deduction could be used for any debt over this amount.
If you take out a home equity loan 90 days after buying your home, you can still deduct the interest, even if you don't use the money to make repairs. For example, say you pay cash for a house on May 1. May 15, you get a $10,000 home equity loan so you can go on vacation. Since you got the loan before 90 days after you bought the house, you can still deduct the interest you paid.
People pay for other things with home equity loans.
Under home equity debt, you can deduct the interest you paid on home equity loans that were used to pay for college, credit card debt, or other costs. But there are limits on how much debt can be taken into account for this deduction.
The amount of the home equity loan must be less than $100,000 (or $50,000 if filing separately) or the fair market value of the house minus the amount still owed on the mortgage used to buy the house. Interest on debts above these amounts, on the other hand, may be eligible for other tax breaks.
Interest Deductions That Go Over Limits
If your home loan debt is higher than the mortgage caps, you may still be able to deduct the interest as a cost of investing or a business expense. If not, the extra debt is considered personal debt and can't be deducted. But next year, if you meet all the requirements, the interest on your home equity debt may qualify. Before you claim a tax deduction, make sure that the IRS rules haven't changed since last year.
