Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, homeowners could claim a plethora of extra tax deductions. But these are no longer an option. After the TCJA became law, it’s more complicated to get a deduction when you borrow against your home’s equity—but it’s still possible if you meet certain criteria.

Key Takeaways

• Interest paid on a home equity loan or a home equity line of credit (HELOC) can still be tax deductible.
• Don’t take out a home equity loan or a HELOC just for the tax deduction.
• The high standard deduction means that even those who can claim a home equity tax deduction may not find it advantageous to do so.

Types of Home Equity

There are two main ways that you can borrow against your home’s equity. You can take out either a home equity loan or a home equity line of credit (HELOC). Both allow you to borrow against the equity that you have in your home, typically for much lower interest rates than other unsecured forms of debt.

Deciding between the two depends on your current situation, specifically how much money you need over what time period. Both a home equity loan and a HELOC carry the same risk of foreclosure if you can’t pay them back, or of going underwater if your home’s value goes down significantly.12 Both home equity loans and HELOCs have the same rules on home equity tax deductions.3

Specific Tax Rules

To qualify for a tax deduction for your home equity loan or a HELOC, you must meet certain criteria.

Only the interest on the home equity loan or the HELOC may be deducted, and it must be used to “buy, build, or substantially improve the taxpayer’s home that secures the loan.”3

The Internal Revenue Service doesn’t explicitly state what does and doesn’t count under “buy, build, or substantially improve.” If you’re unsure if your expenses will count, save your receipts and consult with a tax preparer for specific advice.

In addition to limiting the deduction to certain expenses, the interest deduction is only available for a total loan amount of $750,000. This means that if you are claiming the mortgage interest deduction for both your primary mortgage and your home equity loan or HELOC, you can only claim interest on up to $750,000 of combined loan balances.3

Lowering Your Tax Burden

Leveraging your home’s equity just for the sake of lowering your taxes may not be the best financial choice. The high standard deduction means that you may not have tax savings, and even if you do, you’re paying money to the bank to avoid paying a similar amount of money to Uncle Sam—and eroding your home’s equity in the process.

Itemizing vs. the Standard Deduction

In addition to limiting claiming the mortgage interest deduction, the TCJA substantially raised the standard deduction. In 2022, the standard deduction is $12,950 for single filers and married couples filing separately or $25,900 for married couples filing jointly.4

This means that for those filers not already itemizing, unless they have a particularly high interest rate and loan balances, taking the standard deduction may result in the highest refund. For those already itemizing for other reasons, adding on home equity tax deductions can reduce their tax bill. 

What is the difference between a home equity line of credit (HELOC) and a home equity loan?

A home equity line of credit (HELOC) and a home equity loan both use the equity that you have in your home as collateral. A HELOC is a credit line that allows you to spend, or not spend, up to your limit as needed and pay down over time. A home equity loan is a loan for a set lump sum that you make fixed interest rate payments on over a specified period of time.5

How much equity do you need for a home equity loan or a HELOC?

Individual requirements vary among lenders, but you’ll need a minimum of 75% equity in your home for a HELOC. Most lenders require a minimum of 80% equity for a home equity loan.67

How do I calculate the equity in my home?

To calculate the percentage of equity that you have in your home, subtract the current balance on any loans that you have on your home from the current estimated value of your home. Next, divide that figure by the value of your home.

Here’s how that works with a home valued at $400,000 with a loan balance of $300,000.

$400,000 – $300,000 = $100,000

$100,000 ÷ $400,000 = 25%

In other words, this homeowner has 25% equity.

The Bottom Line

Newer tax rules still allow you to claim a home equity tax deduction on the interest paid on your HELOC or home equity loan as long as you’re using the money to buy, build, or substantially improve the property that the HELOC or home equity loan is based on. With the increased standard deduction, you may not end up claiming the interest paid for the home equity tax deduction unless you’re going to itemize your return.