Updated: Mar 18, 2024

The Tax Advantages of Taking a HELOC

The IRS is most generous with people who take out a HELOC to improve their homes. This category of borrowers can deduct interest payments up to a value of one million dollars for a couple filing their tax returns together.
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The Home Equity Line of Credit (HELOC) offers an economical way of consolidating debt and financing college education, home improvements, medical expenses, and many other similar periodic financial demands that cannot easily be fitted into the regular household budget.

While the prime advantages of using a HELOC over other loan types are the lower interest rates obtainable and the right to draw on the loan in installments as needed, the tax advantages are also well worth including in your calculations.

While clearly every individual needs to discuss with their own bank and tax consultant how their HELOC interest payments could be discounted against their tax bill, it is useful to have a general picture of the tax concessions available and the eligibility conditions that need to be met.

Basic Factors Determining a HELOC’s Tax Value

The IRS is most generous with people who take out a HELOC to improve their homes. This category of borrowers can deduct interest payments up to a value of one million dollars for a couple filing their tax returns together, or half this amount if they file tax returns separately. If you take a HELOC other reasons the maximum amount that can be deducted against tax is $100,000 for joint tax return filers or $50,000 for those who file separate tax returns. These figures only apply to mortgages taken out after October 13, 1987.

While these tax concessions are available for HELOCs taken out against first homes, the situation with HELOCs on second homes is more complex. For example, if you rent out the second property you may lose the right to deduct the HELOC interest payments from your tax unless you also live in the second home for two weeks a year or ten percent of the time you rent it out; the larger of these two figures is the one that is going to be taken into account when determining your eligibility for the tax reduction.

Although it is only possible to claim tax deductions against one second home, if you own a number of second homes in certain circumstances you are allowed to change which of these you include in the tax deduction claim. For example, suppose you have your first home in New York, and second homes in California and Florida, and the tax deduction is claimed against the second home in California. If you decide in the course of the year to make the home in Florida your first home you can change which of your second homes is going to be entered in the tax deduction claim.

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HELOC Tax Reduction Calculations Need Professional Input

The importance of obtaining professional tax advice to discover your exact tax deduction rights is reinforced when a few of the more complicated yet not uncommon scenarios are considered. For example, suppose you work from your home and have converted part of the house into an office. You are only able to claim tax concessions against the HELOC interest payments for the part of the house that you live in.

Another common case is where a HELOC borrower rents out part of their property. Whether the tenant uses the rented area for residential or business purposes and whether or not the rented area is self-contained are going to affect the property owner’s eligibility for setting HELOC payments against taxes.

In view of recent extensive property damage caused by hurricanes and flooding, it is also important to know that even if you are unfortunate enough to lose your first or second home in one of these disasters you might be able to continue to claim tax reductions on the HELOC interest payments. This concession is granted if you rebuild your home within what the IRS define as a reasonable period, or if you sell the land.

The Bottom Line

If you are assessing the advantages of taking out a HELOC you have only to gain by carefully investigating the potential tax benefits. Although in the majority of cases it should be possible to deduct HELOC payments from your taxes, the extent of the reductions is affected by how the property is used. For those who have already taken out HELOCs, eligibility for tax reductions is also determined by which date category the mortgage fits into. Much valuable information is available on the IRS’s Website yet there is no substitute for professional advice to determine how the regulations are going to be applied in each individual case.

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