A HELOC, or Home Equity Line of Credit, offers certain tax advantages that consumers should take into consideration. The HELOC is not a lump sum loan, but a credit line one can borrow against that is backed by the equity in one’s home.
Even though a HELOC is not a traditional mortgage refinance or equity loan, the interest one pays toward a HELOC is tax deductible just like traditional mortgage debt.
Bear in mind that the tax value of a HELOC is modest, but it can help depending on what you’re doing with the money. The IRS policies are most favorable to those who use HELOC funds to pay for home improvements. One can deduct more interest if it’s used for home improvement; funds used for other purposes are only deductible up to $100,000, while home improvement funds are deductible up to $1,000,000.
All of these tax advantages are primarily for one’s first mortgage. A HELOC taken out against a second home or rental property may not be eligible for any of these deductions.
Calculating your after-tax HELOC rate:
- Calculate your total tax rate (for example, 30% federal + 5% state = 35%).
- Subtract that total from 100 (100 – 35 = 65%)
- Multiply this percentage by your HELOC interest rate (.65 x 4.56 = 2.96%)
- This percentage is your true HELOC rate after taking tax deductions.
Credit.org doesn’t offer legal or tax advice, so we urge people who are considering deducing HELOC interest payments on their tax returns to consult a tax professional when filing a tax return.
For any HELOC advice or housing counseling needs, call us today for a confidential, on-demand session.