The Internal Revenue Service states that you may be able to deduct the interest on your home equity loan if you used the money to “buy, build, or extensively modify your home” (IRS).
Before the TCJA was enacted, you could still deduct interest on home equity loans even if they were used for other financial objectives like debt consolidation or the purchase of another asset. Be sure to check if you’re also eligible for the simplified home office deduction or the moving expenses tax deduction, which are all related to your home. The current regulation, however, only allows expenses related to home repairs to be deducted for home equity interest. FlyFin or a 1099 tax calculator can help you find deductions and know how much to pay in taxes.
[H2]What conditions must be met before a home equity loan can be deducted for interest?[H2]
- A second Form 1098—At the end of the year, the loan servicer for your current loan should give you a Form 1098. By examining the sum, you may determine the amount of interest that was accrued in Box 1.
- A duplicate of your final disclosure: You’ll receive a disclosure of every expense incurred during the purchase of your home three business days prior to closing.
- An exact copy of your loan application: Maintain a copy of this, also known as a standardized residential loan application, on hand as additional proof that the home you purchased was your primary or secondary residence.
- Copies of the invoices for home improvements: To prove that you used the money from your home equity interest deduction to pay for improvements to your house, save copies of all of your receipts, bills, and work orders.
- If you already have a first mortgage, you may also deduct the mortgage interest you paid from the interest you pay on your home equity loan. With one exception, if you used your equity in a cash-out refinance to borrow more money than your previous mortgage allowed, you won’t be able to deduct interest on that additional loan amount unless it was used to improve your home.
- Mortgage payments made in addition: An advance payment made in exchange for a lower mortgage interest rate is known as a “discount point” or “mortgage point.” However, if certain conditions are met, you might be allowed to deduct mortgage points in the year that you pay them instead of spreading them out over the course of the loan’s life.
- Gains from the sale of your home: Thanks to tax laws, you can keep a portion of the sale price of your home without paying any taxes on it. Married couples are permitted to keep up to $500,000 of their sale-related earnings tax-free, compared to an individual taxpayer’s exemption of $250,000 in taxes. If you sold your primary residence within the last five years and resided there for two of those years as your primary residence, you are eligible for this tax benefit.
- If you can show that a percentage of the square footage in your home is used for company operations, you may be eligible for this deduction. It will be necessary for you to show evidence that the addresses for your house and business are identical. 300 square feet of your home may be written off as a business expense at a fixed rate of $5 per square foot. You might receive an IRS notice if you try to write off your whole home as part of the self employment tax deduction.