If you have borrowed against your home’s equity through a home equity loan or home equity line of credit (HELOC) and used those funds to update or renovate your home, you may qualify for tax deductions for any interest you have paid.
As tax season approaches, you’ll want to take advantage of every possible tax deduction you and your accountant can find — and doing so can simply be a matter of finding the right documentation. Here’s what you need to know about qualifying for home equity loan or HELOC tax deductions and how to prepare your documents.
Prior to 2018, homeowners could earn tax deductions for interest paid for home equity borrowing that went towards any expenses – whether home improvements or lavish vacations. To qualify for home loan tax deductions in 2022, the loan or HELOC given must have been used to “buy, build, or substantially improve” the home against which the loan was taken.
Also, homeowners can now only deduct interest paid against up to $750,000 on mortgage debt (as opposed to the previous $1,000,000 limit).
While these new rules area a bit stricter, many homeowners using home equity loans and lines of credit to repair, renovate, or restore their home should be able to qualify for the interest tax deduction.
The first and most important consideration homeowners must fulfill before they can qualify for tax deductions on home loan interest is that the loan must have been used to “buy, build, or substantially improve” your home.
It is important to note that you’ll only qualify for a deduction here if you used your loan or line of credit to significantly improve the home against which you have borrowed. This means that you cannot use a line of credit on one house to improve or refurbish another home.
Before you can qualify for tax deductions on your HELOC interest, you’ll need to give a detailed account of what you have used the funds in your home loan or line of credit account for.
Be sure to keep a detailed record of all contractor receipts, individual renovation expenses, and bank statements that show how you have spent the funds, as these documents will be required by the IRS to earn the deduction.
A mortgage interest form (Form 1098).
Prior to tax season, you should receive a mortgage interest form (IRS 1098) from your lenders. This form includes details of the interest paid on your mortgage or HELOC in the previous tax season. It is also what you need to tender if you want to enjoy tax deductions.
Any payments you made to contractors to update your home need to be retained. This will help demonstrate that your home loan or line of credit went towards a specific expense related to your home.
Receipts for any personal improvement-related expenses.
Just as with a contractor, you’ll want to keep receipts for any purchases you made – either on behalf of a contractor or that you installed. This can be as small as a receipt for a box of nails or as large as home flooring tiles or a kitchen appliance. While not every expense you make will necessarily qualify, you’ll want to show that your funds went towards your home’s improvement.
The pursuit of happiness does not come without its own challenges, especially when it comes to home purchases and improvements. However, the IRS helps citizens out by deducting mortgage interest through tax breaks to make improvements to your home.
To claim these breaks, you’ll have to do some extra work by itemizing the tax deductions you’re entitled to rather than settle for the standard deductions. But doing so will allow you to reduce the cost of home renovations and enjoy the comfort of your updated home.