Can you claim interest on a HELOC? This is a common question among homeowners who have a Home Equity Line of Credit (HELOC). Understanding whether you can deduct the interest on a HELOC is crucial for tax planning and financial management. In this article, we will explore the rules and guidelines surrounding the deduction of HELOC interest for tax purposes.
The Internal Revenue Service (IRS) allows homeowners to deduct the interest on a HELOC if the funds are used for certain qualified purposes. However, it’s essential to meet specific criteria to qualify for this deduction. Let’s delve into the details.
Firstly, the HELOC must be used to buy, build, or substantially improve the taxpayer’s primary or secondary residence. If the funds are used for other purposes, such as paying off credit card debt or financing a vacation, the interest may not be deductible.
Secondly, the total amount of mortgage debt, including the HELOC, must be within certain limits. For married taxpayers filing jointly, the combined loan limit is $750,000. For married taxpayers filing separately, the limit is $375,000. Single taxpayers are subject to a $500,000 combined loan limit.
If you meet these criteria, you can deduct the interest on your HELOC on Schedule A of your tax return. However, it’s important to note that the deduction is subject to the overall itemized deductions limit. If your total itemized deductions are less than the standard deduction, it may be more beneficial to take the standard deduction instead.
Additionally, the HELOC must be secured by the taxpayer’s home to qualify for the interest deduction. If the HELOC is unsecured, the interest may not be deductible.
It’s worth mentioning that the Tax Cuts and Jobs Act (TCJA) of 2017 has changed the rules regarding mortgage interest deductions. Under the TCJA, homeowners can only deduct interest on mortgages for primary and secondary homes up to $750,000 ($375,000 for married taxpayers filing separately). This limit was previously $1 million ($500,000 for married taxpayers filing separately). However, the TCJA did not affect the deductibility of HELOC interest if it meets the criteria mentioned earlier.
In conclusion, you can claim interest on a HELOC if you use the funds for qualified purposes, such as buying, building, or substantially improving your primary or secondary residence. Ensure that the combined loan limit is met and that the HELOC is secured by your home. Consult with a tax professional or financial advisor to determine the best approach for your specific situation and to ensure compliance with current tax laws.
