Can I Deduct the Interest on My Home Equity Loan?

Jene J. Long
A group of friends eating a meal around a backyard patio table.

Image source: Getty Images

The quick answer? Maybe.


Key points

  • A home equity loan lets you borrow against your home.
  • In some cases, the interest you pay on that loan can serve as a tax break.

Taking out a home equity loan is one of the most affordable ways to borrow money. That’s because home equity loans typically come with lower interest rates than what personal loans or other financing options charge.

The great thing about taking out a home equity loan is that you don’t need to use that money for home-related expenses. You can take out a home equity loan and use its proceeds to start a business, pay off credit card debt, or even take a vacation.

If you’ve been paying off a home equity loan, you may be wondering if it’s possible to snag a tax break out of the deal. In some cases, the interest you pay on a home equity loan is tax deductible. But whether that benefit applies to you will hinge on what you used your home equity loan for.

When a home equity loan results in a tax break

As mentioned, you can take out a home equity loan and use that money for any purpose. But if you want to write off your loan’s interest on your tax return, you can only do so if you used that money to improve your home.

Keep in mind that the IRS distinguishes between home improvements and home repairs. If you took out a $15,000 home equity loan and used that money to fix a cracked foundation, that counts as a repair, which means you generally won’t get to write off your interest on that loan. But if you took out a $15,000 home equity loan and used that money to build a deck or finish your basement, then you most likely can write off your interest on that loan.

To be clear, though, you can only claim a tax deduction for your loan’s interest portion, not its principal. So if you paid $3,000 toward your home equity loan last year but only $600 of that was interest, then you’re limited to a $600 tax break.

Home equity loan limits you should know about

The date your home equity loan was signed could influence the deduction you’re able to take. If you took out a home equity loan after Dec. 15, 2017, you can deduct interest on a loan of up to $750,000 if you’re a joint tax filer, or up to $375,000 as a single tax filer. If you took out a home equity loan prior to that date, these limits are $1 million and $500,000, respectively.

Related: Best Tax Software

Can you claim a home equity loan interest deduction?

Let’s say you used your home equity loan to improve your home. In that case, you can claim a tax deduction on its interest — but only if you itemize your taxes. If you don’t, then you can’t claim this deduction, nor can you deduct things like interest on a primary mortgage.

Itemizing on your taxes only makes sense if you’ll have enough of a total write-off to exceed the

standard deduction for 2021. The standard deduction hinges on your filing status, as follows:

  • $12,550 for single filers or married people filing separately
  • $18,800 for head of household
  • $25,100 for married couples filing jointly

So, let’s say you’re single and between your various deductions, you have a total of $13,500 in write-offs for your 2021 tax return. In that case, itemizing makes sense. But if you’re only at $10,000 between your various deductions, then that means you’re better off choosing the standard deduction — even if it means forgoing a write-off for the interest you paid on your home equity loan.

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