Explore the world of home equity loans and HELOCs, their benefits, and how you can potentially deduct interest payments on home improvements. Learn which projects qualify for tax deductions and which don't. Discover how to make the most of these financing options for your home renovation goals.
Looking to access some cash to fund a home improvement project, pay down debt or accomplish another goal? If you own a home with sufficient home equity, you may be able to tap it for the money you need. Two of the most common options to borrow against your home's value are through a home equity loan or home equity line of credit ( HELOC ). These lending options can benefit you in distinctly different ways.
For example, home equity loans give you a lump sum with fixed payments, while HELOCs let you borrow from a line of credit as necessary (up to the HELOC limit), which can give you more flexibility in terms of borrowing for ongoing projects. \Tax benefits are another potential plus these home equity options offer. In general, you may be able to deduct interest payments on home equity loans and HELOCs if the funds were used on eligible home improvements or upgrades. Not all home expenses qualify for the tax deduction, though. Here's what you need to know about what projects qualify for home equity loan tax deductions, and which don't. \The IRS allows you to deduct your interest payments on home equity loans and HELOCs 'if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan.' The loan must be secured by your primary or second home and adhere to specific eligibility criteria as well. Here are some popular home improvements that may qualify for the deduction. Kitchen renovations and bathroom remodels are one of the most effective ways to add value to your home. There's a common saying in real estate: 'Kitchens and bathrooms sell homes.' These areas are functional and contribute to your home's appeal, so buyers often prioritize them when evaluating a property. 'Kitchen and bathroom remodels are the most common projects I have seen, and typically the most bang-for-your-buck in terms of home value appreciation,' says Andrew Herzog, a certified financial planner at The Watchman Group. Learn more about your home equity borrowing options now. New rooms or floors Your home's square footage is a significant factor in determining its value, so increasing its size with a new office, bedroom or even a new floor could boost your home's value. According to home services platform Angi, adding a second story adds up to 65% return on investment (ROI), depending on various factors. Herzog notes that adding extra space to a critical area of the home, such as a kitchen or bathroom, can qualify as a substantial improvement. Installing solar panels If you use your home equity loan or HELOC funds to add solar panels to your home, the interest may be tax deductible if it increases your home's value. Roof replacements You might consider a home equity loan to put a new roof on your house. Not only will a new roof protect against leaks and enhance your home's curb appeal, but it may also qualify as a 'substantial improvement' by increasing your home's value. According to Remodeling Magazine's 2024 Cost vs. Value Report, this type of improvement can deliver up to nearly 57% return on investment. Basement or attic conversions Improvements that help your home adapt to new uses may qualify for the home equity loan tax deductions. A home equity loan could give you the funds to transform a basement or attic into a family room, bedroom or office. Angi estimates basement remodels may recoup up to 70% of their costs. \Not all interest from home-related expenses is tax deductible. Generally, home improvements are eligible for the deduction, but repairs are not. But how can you distinguish between the two and know what is or isn't deductible? 'A good general guideline to distinguish between home improvement and home repair is an improvement adds lasting material value, such as a new roof vs. installing a new toilet,' says Kristine Stevenson Seale, an IRS enrolled agent and tax resolution specialist. 'A repair keeps the house in good working order. There's no deduction for repairs. Improvements increase the value, or basis, of the home.' The bottom line Rates on home equity loans and HELOCs currently average around 8.50%, and rates on this type of borrowing are almost always lower than personal loans and credit cards. Still, remember that these loan options are secured by your home, so only borrow what you can comfortably afford to repay, as missed payments could lead to foreclosure. Check with your accountant or tax professional to confirm whether any home equity loan funds you use are tax deductible, and be sure to keep receipts. 'Maintaining records and appropriate documentation is always important when it comes to tax reporting, but even more so when it comes to home improvement costs,' James Guarino, a CPA and managing director at Baker Newman Noyes, say
HOME EQUITY LOAN HELOC TAX DEDUCTION HOME IMPROVEMENT RENOVATION MORTGAGE
United States Latest News, United States Headlines
Similar News:You can also read news stories similar to this one that we have collected from other news sources.
Why HELOCs are cheaper than home equity loans nowBoth allow you to borrow against your home's equity, but HELOCs offer measurable savings in today's market.
Read more »
Home Equity Loans: Potentially Even More Advantageous in 2025Home equity loans offer attractive benefits, especially when compared to credit cards and personal loans. In 2025, two key advantages could become even more pronounced: lower interest rates and greater borrowing amounts. Explore these benefits and other advantages of home equity loans to make informed borrowing decisions.
Read more »
HELOC Rates in 2025: Pros and Cons to ConsiderThis article explores the advantages and disadvantages of Home Equity Lines of Credit (HELOCs) in 2025, focusing on their lower interest rates compared to credit cards and personal loans. It highlights HELOCs as a viable option for homeowners seeking large sums of money, but emphasizes the importance of strategic utilization of home equity.
Read more »
Can You Lose Your Home With a Home Equity Loan?Discover the risks and rewards of home equity loans, and learn how to protect your home from foreclosure.
Read more »
3 Things to Consider Before Borrowing Home Equity in 2025With interest rates on credit cards and personal loans soaring, home equity loans and HELOCs offer attractive lower rates. However, homeowners should approach borrowing strategically. This article outlines three crucial factors to consider before tapping into home equity this year, emphasizing the importance of repayment ability and responsible borrowing practices.
Read more »
2 ways to use your home equity in 2025 (and 2 to avoid)Home equity loans and HELOCs can be valuable financial tools in 2025 if used for these specific reasons.
Read more »