When is a home equity loan tax deductible?
First of all, only the interest paid on a home equity loan qualifies for a tax deduction. You won't be allowed to deduct any money you paid toward the loan's principal. However, you'll need to itemize your deductions instead of taking the standard deduction in order to deduct the interest.
How much can you deduct?
The rules vary based on whether you secured a home equity loan before or after the passage of the Tax Cuts and Jobs Act of 2017:
For home equity loans taken out before Dec. 16, 2017:
You can deduct mortgage interest, including home equity loan interest, on the first $1 million of mortgage debt. If you're married and file separate tax returns, you can only deduct interest on the first $500,000 of mortgage debt.
For home equity loans taken out Dec. 16, 2017 or later:
You can only deduct mortgage interest, including home equity loan interest, on the first $750,000 of mortgage debt. If you're married filing separately, you can only deduct interest on the first $375,000 of mortgage debt.
Limits on deducting home equity loan interest
The Tax Cuts and Jobs Act, or TCJA, didn't just change how much interest you can deduct for mortgage-related debt. It also narrowed the rules for when you can deduct interest on a home equity loan or home equity line of credit (HELOC).
Before the law took effect, you could deduct home equity loan interest no matter what you used it for. If you used the funds to pay off credit card debt or medical debt, you could still deduct the interest. But TCJA suspended the deduction for home equity loans and HELOCs for tax years 2018 to 2025 unless they're used to buy, build, or substantially improve a qualifying primary or secondary home.
Why deducting home equity loan interest may not be worth it
To deduct mortgage or home equity loan interest, you'll need to itemize your deductions at tax time. But for many taxpayers, itemizing is no longer worth it. That's because the Tax Cuts and Jobs Act nearly doubled the standard deduction, which is the fixed amount you can deduct on your taxes, even if you have no expenses.
The standard deduction for 2023 is $13,850 for single filers and $27,700 for married couples filing jointly. If you don't have deductions exceeding these thresholds, you're better off taking the standard deduction, even if that means you can't deduct home equity loan interest. Nearly 90% of taxpayers now take the standard deduction instead of itemizing, according to IRS data.