Home improvements can greatly increase the value and enjoyment you get from your home. However they often require significant upfront costs. Taking out a loan is one way to finance large home improvement projects. But can you deduct the interest on a home improvement loan from your taxes?
The answer depends on the type of loan you use. Generally, interest on home improvement loans, which are unsecured personal loans, is not tax deductible. However, interest on home equity loans and lines of credit, which are secured by your home, may be partly or fully deductible.
Below is a detailed guide on the tax deductibility of different types of loans used for home improvements,
Home Improvement Loans
A home improvement loan is an unsecured personal loan that you can use for renovations, repairs or upgrades to your home. These loans are offered by banks, credit unions and online lenders.
Since home improvement loans are not secured by your home, the interest is not tax deductible. The IRS only allows mortgage interest deductions on loans secured by your primary residence or second home.
Even if you use a home improvement loan solely for deductible home improvements, you cannot write off the interest on your taxes.
Home Equity Loans
Home equity loans and lines of credit (HELOCs) allow you to borrow against the equity in your home. They are secured by your home, meaning the lender can take possession if you default.
Interest on home equity loans and HELOCs may be partly or fully tax deductible, depending on how you use the funds.
Tax Deductible Uses
The IRS allows homeowners to deduct interest on up to $750,000 of home equity debt used to “buy, build or substantially improve” their primary residence or second home. This includes:
- Major renovations and upgrades like kitchen or bathroom remodels
- Room additions and other home expansions
- Landscaping and exterior upgrades like decks, patios and pools
- Systems upgrades like HVAC, plumbing and electrical
- Disaster repairs like flood, fire or hurricane damage
To qualify for the deduction, the improvements must substantially extend the life, enhance the value or adapt the home to new uses. Minor repairs and maintenance do not qualify.
Non-Deductible Uses
You cannot deduct interest on home equity loans used for non-qualified expenses like:
- Paying off credit card debt
- Funding college tuition
- Medical bills
- Car repairs
- Vacations
- Daily living expenses
The IRS limits deductible home equity interest to only the funds used for home improvements. If you use a HELOC for both qualified and non-qualified purposes, you can only deduct a portion of the interest.
Carefully track how you use home equity loan funds to maximize deductions. Consult a tax professional for guidance.
HELOCs vs. Home Equity Loans
HELOCs tend to offer more tax deductibility flexibility than fixed-rate home equity loans. With a HELOC, you can draw and repay funds as needed, deducting interest only on amounts used for improvements.
It’s harder to deduct interest on lump-sum home equity loans, especially if you use funds for multiple purposes. Unless the full amount goes towards eligible home improvements, some interest will be non-deductible.
However, home equity loans may still be the better option if you need upfront project financing and want to lock in a low fixed rate.
Home Equity Tax Deduction Limits
The IRS limits the total amount of mortgage and home equity interest you can deduct each year:
- You can deduct interest on up to $750,000 of total home equity debt used for home improvements.
- You can deduct interest on up to $750,000 of mortgage debt used to buy, build or improve your primary residence and second home.
- That’s a combined limit of up to $1.5 million of deductible housing debt.
If you exceed the $1.5 million limit, any additional interest is not deductible.
Also note that the 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction. With higher standard deductions, fewer taxpayers now itemize and benefit from mortgage interest deductions.
Tapping Home Equity for Deductions
If you have owned your home for many years, chances are you have built up substantial equity. Tapping into this equity can provide funds for home improvements while generating tax deductions.
Homeowners with at least 15% equity may qualify for a home equity loan or line of credit. Average home equity loan rates are currently around 7% APR compared to 16% APR for unsecured home improvement loans.
Review home equity lending options to find the most competitive rates and terms. Then use funds strategically for improvements that qualify for deductions.
Tracking Deductible Interest
To maximize tax deductions on home equity debt, separate deductible and non-deductible uses:
- Use a HELOC only for improvements, withdrawing funds as needed for each project.
- Or, withdraw a lump sum home equity loan entirely for improvements.
- Avoid mixing improvement funds with non-deductible expenses.
Carefully track how you use the funds and make payments. When tax time comes, calculate interest only on amounts used for eligible home improvements.
Consult a tax professional to ensure you properly calculate deductible interest. Keep receipts and records documenting your home improvement expenditures.
Other Home Improvement Tax Credits
Beyond potential interest deductions, other tax credits may help offset home improvement costs:
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Energy efficiency tax credits: You can claim credits for up to 30% of the cost of installing solar panels, energy-efficient windows and doors, and certain other green upgrades.
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Medical expense deductions: Home renovations like wheelchair ramps and grab bars that enable mobility or medical care may be partly deductible as medical expenses if they exceed 7.5% of adjusted gross income.
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Home office deductions: Homeowners can deduct expenses for a dedicated home office used regularly and exclusively for their business. Renovations like building out a home office may qualify.
Consult your tax advisor to learn which credits and deductions you may be eligible to claim.
The Bottom Line
While interest on personal home improvement loans is not tax deductible, homeowners may partly or fully deduct interest on home equity debt used to substantially improve their primary or second residence.
Carefully track how you use home equity loan or HELOC funds to maximize eligible deductions. Other tax credits may also help defray home renovation costs. Discuss options with a tax professional.
With strategic planning, you can potentially reap thousands of dollars in tax savings on major home improvement projects. Just be sure to use the right loan product and follow IRS rules closely when claiming deductions.
What Tax Forms Do You Need From Your Lender?
In order to qualify, you must prove how you used the funds to claim the HELOC interest tax deduction. This includes providing receipts of all materials, labor, and other costs incurred to renovate the property, contractor contracts, and any other documentation that shows the intended use of the funds, as well as your Closing
Home Repairs vs Home Renovations (Improvements)
Home repairs involve fixing or maintaining your existing home to keep it in good condition. These are typically considered routine maintenance and are not deductible on your federal income tax return. Home repair expenses are generally considered personal expenses and do not provide any tax benefits.
Examples of home repairs include fixing a leaky roof, repairing a broken window, replacing a damaged door, or fixing a malfunctioning HVAC system. These are expenses incurred to keep your home in its current condition but do not add significant value or substantially improve the property.
Home renovations or improvements involve making substantial changes or upgrades to your home that enhance its value, increase its useful life, or adapt it to new uses. These improvements are considered capital expenses and, in some cases, can be tax-deductible or result in tax benefits.
Examples of home renovations include:
- Adding a new room or an addition to your home.
- Upgrading the kitchen or bathroom.
- Installing a new heating or cooling system.
- Adding a swimming pool.
- Installing energy-efficient improvements, such as solar panels or insulation.
Is home improvement loan interest tax deductible?
Are home improvement projects tax deductible?
Some home improvement projects that make necessary modifications for medical needs, upgrades for energy efficiency, or improvements for the home’s value are tax deductible or offer tax credits. These tax credits or tax deductions are only available in certain situations and with the proper documentation.
Are home loans tax deductible?
To qualify for a tax deduction, the IRS requires that the loan be secured by your home and used for significant improvements. This means that interest on loans for routine maintenance or repairs is not deductible. The Tax Cuts and Jobs Act of 2017 further specifies that only interest on loans used for substantial improvements may be deductible.
Are home improvement loans tax deductible?
Yes, the interest on home improvement loans is generally tax-deductible, provided the loan funds substantial improvements to the primary residence. What is considered a substantial improvement? Substantial improvements are those that significantly enhance the property’s value, extend its lifespan, or adapt it for new uses.
How do I claim a home improvement loan interest deduction?
To claim the interest deduction on home improvement loans, maintain copies of loan statements, receipts, and relevant documents showcasing the interest paid. Utilizing a spreadsheet or accounting software streamlines expense tracking, aiding in accurate calculations when filing taxes.