Is HELOC Interest Tax Deductible?

Understanding HELOC Tax Advantages

A Home Equity Line of Credit (HELOC) can provide homeowners with financial flexibility and certain tax benefits. While it differs from a traditional mortgage refinance or home equity loan, a HELOC offers unique opportunities for homeowners to manage expenses and reduce taxable income.

This guide explains how HELOC tax advantages work, how to calculate your after-tax HELOC rate, and when these benefits apply.

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What Is a HELOC?

A HELOC is a revolving credit line secured by the equity in your home. Unlike a lump sum loan, a HELOC allows you to borrow as needed, up to a predetermined limit.

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Tax Advantages of a HELOC

HELOC interest payments may be tax-deductible, similar to traditional mortgage debt. However, the extent of these benefits depends on how the funds are used:

1. Home Improvement Deduction

• Interest on HELOC funds used for home improvements is deductible up to $1,000,000 of mortgage debt.
• Eligible improvements include renovations that add value to your home, such as remodeling a kitchen or adding a new roof.

2. Other Uses

• If HELOC funds are used for non-home improvement purposes (e.g., debt consolidation or education), the deductible limit is $100,000.

Learn more about deductible mortgage interest from the IRS Publication 936.

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Limitations on HELOC Deductions

The tax advantages of a HELOC are primarily tied to your primary residence:

• A HELOC taken against a second home or rental property may not qualify for deductions.
• Review specific rules for second properties in the IRS Tax Topics.

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How to Calculate Your After-Tax HELOC Rate

To determine the actual cost of your HELOC after tax deductions, follow these steps:

1. Determine Your Total Tax Rate:
   Add your federal and state tax rates. For example, 30% federal + 5% state = 35%.
2. Calculate the After-Tax Percentage:
   Subtract your total tax rate from 100%. Example: 100% - 35% = 65%.
3. Multiply by the HELOC Interest Rate:
   Multiply your HELOC interest rate by the after-tax percentage. For instance (.65 x 4.56 = 2.96%)
   • HELOC rate: 4.56%
   • After-tax rate: 0.65 x 4.56 = 2.96%‍
4. This percentage is your true HELOC rate after taking tax deductions.
   

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When to Consider a HELOC

A HELOC may be a good option for:

• Funding major home improvements.
• Consolidating high-interest debt.
• Managing large, unexpected expenses.

Before applying for a HELOC, explore your financial goals and assess whether it’s the right tool for your needs. You can learn more about home equity options at Consumer Financial Protection Bureau.

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Get Professional Guidance

Navigating HELOC options and their tax implications can be complex. Our HUD-approved housing counselors are available to help you understand your options and make informed decisions.

Contact us today for free, confidential counseling, or call 800-431-8157 to schedule a session.