Your home equity loan is a tax benefit: You already know that the mortgage interest on your home is a (huge!) tax deduction, but did you know that the interest on home equity borrowing is a tax deduction too?
Home equity loans got a bad rap after the Financial Crisis, but now they are back in a big way.
While most people are aware that they can borrow against the value of their home, many don't take advantage of the tax benefits associated with doing so. In fact, all of the interest on up to a 100k loan is tax deductible in addition to your mortgage interest.
That's a significant deduction come tax season, so be sure you don't overlook it if you have borrowed against your home's value.
How to get the home equity loan deduction
Claiming this deduction is easy. To deduct the interest paid on your home equity line of credit, or "HELOC," you'll want to itemize deductions using IRS Form 1040.
Keep in mind you can only deduct the interest paid on the first 100k for the HELOC, although you'll still be able to also deduct the interest on up to a $1M mortgage.
If you'd like to deduct more than than that limit, you'll have to spend part of that HELOC on home improvements.
Be sure to get form 1098 from your lender
Before tax season starts, you should get Form 1098 from your lender showing the interest paid on your home equity line of credit.
Just itemize that amount on IRS Form 1040 on line 10 of Schedule A.
While all CPA's and the top brands of tax software should prompt you for this deduction, it's overlooked at a surprising rate, and it's a costly mistake!
Borrowing Against Your Home's Equity Is Not Always a Good Idea
While there are no restrictions on what you use your HELOC for, remember to be smart. Many home improvements are a smart investment that you'll recoup later, but remember that some projects, like adding a swimming pool or home theater are a bad investment for resale.
Those expensive add-ons might win you points with the kids, but they'll cost you big-time when you resell your house!
Anyway, I'm writing about this because my sister overlooked the HELOC deduction and had to amend her tax return last year. The mistake may end up costing her hundreds of dollars, so please forward this to anyone who you think might benefit from this "reminder."
If you'd like to know more, check out this informative article about HELOC from TurboTax.
Questions? Reply with a comment below, plus I'm always happy to answer questions from my tax blog here!