When people deciding to start a home renovation project, most of these homeowners may financed these projects with home equity loans and HELOCs. But there is one tip you may ignore: the interest you pay on these loans might be tax deductible.
Some home equity borrowers will choose to claim the expanded standard deduction on next year’s taxes, it may be worth it for homeowners who’ve renovated to look into claiming itemized deductions and writing off home equity loan interest.
Are you wondering if you’ll get a tax break on the money you spent remodeling your home? The answer is, it depends on what improvements you make, and how you keep track of your costs.
In this article, we’ll discuss how to make sure that you are qualify a tax deduction, and what type of home improvement loans are tax deductible.
What is the Home Mortgage-Interest Deduction, and How Do You Qualify?
Every year, homeowners can choose a tax deduction among these 3 choices: flat tax deduction, standardized deduction, or itemized deductions for things like mortgage interest, medical expenses, business expenses, etc.
Usually, homeowners will choose which method they take based on their own situation, and which method will offer a larger deduction.
The home mortgage-interest deduction is a common deduction that will deduct interest from a first or second mortgage (home equity loan) off of your taxes.
According to the IRS, the first requirement before taking a home mortgage interest deduction, is that your debt must be secured by a qualified home. If you use unsecured loan to pay for home renovations, you won’t qualify for a mortgage-interest deduction.
What Is A Qualified Home?
It could be your first or second home, and the types includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. If you treat your second home as a rental property, you must use the home more than 2 weeks or more than 10% of the number of days during the year that the home is rented at a fair rental.
Therefore, you may deduct some costs from next year’s taxes like mortgage insurance premiums, home equity loan interest, or home mortgage interest.
In most situations, you can deduct the entirety of your home mortgage interest, but the full amount depends on the date of the mortgage, the amount and how you use these money.
What Home Improvements Are Tax Deductible?
In order to qualify for tax deductions on your home equity loan or HELOC interest, the loan must be spent on the property whose equity is the source of the loan. You also must be using the loan for renovations that “substantially improve” your home. The full text of the mortgage interest deduction law is that you can deduct interest from a home loan used to “buy, build or substantially improve” your home.
Before the Tax Cuts and Jobs Act of 2017, all home equity loans were tax deductible. However, home equity loans are no longer deductible if the loan is not being used for the house, so if you want deduct your interest please don’t use this loan on items like vacations, tuition, credit card debt, cars, clothing, etc.