Are home improvements tax deductible?

Many homeowners are taking on home renovation projects, and a significant portion of these homeowners financed these projects with home equity loans and HELOCs. What you may not realize is that the interest you pay on these loans might be tax deductible. 

While some homeowners will choose to claim the expanded standard deduction on next year’s taxes, it may be worth it for homeowners who’ve renovated to look into claiming itemized deductions and writing off home equity loan interest.

The type of home improvements you do will also play a role in figuring out is interest on your HELOC tax deductible.

In order to qualify for tax deductions on your HELOC interest, the loan must be spent on the property whose equity is the source of the loan. The full text of the mortgage interest deduction law is that you can deduct interest from a home loan used to “buy, build or substantially improve” your home.

In this article, we’ll discuss which types of home improvement projects are substantial enough to qualify for tax deductions.

Can You Write Off Home Improvements?

Yes, you can write off home improvements - but should always consult a tax professional.

According to the IRS, you can deduct interest paid on home equity loans if they’re used to “buy, build or substantially improve a taxpayer’s home that secures the loan.” The IRS defines this under Publication 936, called the “Home Mortgage-Interest Deduction.”

And many renovations where homeowners are using a home equity loan or HELOC meet this requirement. The home mortgage-interest deduction is a common deduction that will deduct interest from a primary or secondary mortgage (home equity loan) off of your taxes, and in most cases based on their personal circumstances, homeowners will choose which route will offer a larger deduction.

Whether it’s a first or second mortgage, the rules for claiming tax deductions for home improvements. 

As of December 16, 2017, the rules for deducting interest on a HELOC changed as a result of the Tax Cuts and Jobs Act passing in Congress.

Is your home improvement project tax deductible according to the TCJA? Here’s how to know: 

• If your home equity loan or HELOC was opened before the TCJA: You can deduct mortgage interest on loans up to $1 million. This includes first and second mortgage loans on a primary or second home. But if you’re filing separately as a married taxpayer, you can deduct interest on loans for a maximum of $500,000.
• For home equity loans or HELOCs opened after the TCJA (or December 16, 2017): These loans are subject to the TCJA limits of $750,000 in total mortgage debt. This includes loans on a first or second home. But if you’re filing separately as a married taxpayer,  you can only deduct interest on loans up to $375,000.

Here’s how it works:

Let’s say you borrowed $400,000 to buy your primary residence in 2018. Then two years later you borrowed $200,000 from your home’s equity to buy a second home at the shore. This interest cannot be deducted because you didn’t use the you didn’t use the $200,000 to buy, build, or improve the house the loan is on.

On the flip side, if in 2018, you borrowed $400,000 for your primary residence and one year later borrowed another $200,000 to buy that vacation home, but this time, however, that loan uses the second home as collateral, you can deduct interest on both loans as it follows all borrowing limits.

Are you wondering, can you write off home renovations this year?

The answer will depend on what improvements you make and how you keep track of your expenses. In this guide, we’ll cover everything you need to know about HELOC tax deduction rules and requirements to help you determine if your home improvement loan is tax deductible.

Keep reading to see which types of home improvements are considered to be “substantial.”

What Home Improvements Are Tax Deductible in 2023?

In order to qualify for tax deductions on your home equity loan or HELOC interest, the loan must be spent on the property whose equity is the source of the loan. You also must be using the loan for renovations that “substantially improve” your home. The full text of the mortgage interest deduction law is that you can deduct interest from a home loan used to “buy, build or substantially improve” your home.

Before the Tax Cuts and Jobs Act of 2017, all home equity loans were tax deductible, no matter what. Home equity loans are no longer deductible if the loan is being used for personal items like vacations, tuition, credit card debt, cars, clothing, etc.

If you’re using mortgage debt to fund home maintenance and minor repairs, this is not considered a substantial home improvement, unfortunately. 

The IRS distinguishes between home repairs and home renovations when it comes to tax deductions, and the criteria for deductibility can vary. Here’s how the IRS typically differentiates between the two:

Home Repairs vs Home Renovations (Improvements)

Home repairs involve fixing or maintaining your existing home to keep it in good condition. These are typically considered routine maintenance and are not deductible on your federal income tax return. Home repair expenses are generally considered personal expenses and do not provide any tax benefits.

Examples of home repairs include fixing a leaky roof, repairing a broken window, replacing a damaged door, or fixing a malfunctioning HVAC system. These are expenses incurred to keep your home in its current condition but do not add significant value or substantially improve the property.

Home renovations or improvements involve making substantial changes or upgrades to your home that enhance its value, increase its useful life, or adapt it to new uses. These improvements are considered capital expenses and, in some cases, can be tax-deductible or result in tax benefits.

Examples of home renovations include:

• Adding a new room or an addition to your home.
• Upgrading the kitchen or bathroom.
• Installing a new heating or cooling system.
• Adding a swimming pool.
• Installing energy-efficient improvements, such as solar panels or insulation.

Pro Tip: It’s important to note that tax laws and regulations can change, so it’s advisable to consult with a tax professional or review the latest IRS guidelines to determine whether specific home renovations qualify for tax deductions or credits in a given tax year. Additionally, proper documentation of expenses and improvements is crucial to support any tax claims related to home renovations.

Tax Deductible Home Improvements

The tax treatment of home renovations depends on whether they qualify for specific tax deductions or credits.

• Energy-Efficiency Tax Credits: Some home improvements that enhance energy efficiency, such as installing solar panels or energy-efficient windows, may qualify for federal tax credits. These credits can help offset a portion of the cost of the improvements.
• Home Office Deduction: If you use part of your home exclusively for business purposes and make improvements to that space, you may be eligible for a home office deduction.
• Medical expenses: that were paid out of pocket and not reimbursed by your health insurance plan, including: Construction of ramps, widening doorways or hallways for wheelchair access, and installing modifications to bathrooms or stairways like lifts and handrails.

Home Repairs That are Tax Deductible

• Deck
• New Roof
• Central A/C
• Accessory Dwelling Unit
• Addition
• New Insulation
• New bathroom
• Heating and Plumbing
• Landscaping
• Energy-efficient Equipment
• Painting*

Other Tax Deductions Available: Home Mortgage-Interest Deduction

Every year, homeowners can choose to reduce to get a flat tax deduction, a standardized deduction, or take claim itemized deductions for things like mortgage interest, medical expenses, business expenses, etc.

In most cases, homeowners will choose which route they take based on their own personal circumstances, and which route will offer a larger deduction. 

The home mortgage-interest deduction is a common deduction that will deduct interest from a primary or secondary mortgage (home equity loan) off of your taxes.

According to the IRS, for you to take a home mortgage interest deduction, your debt must be secured by a qualified home. If you use any type of unsecured loan to pay for home renovations, this will not qualify you for a mortgage-interest deduction. 

What Counts As A Qualified Home?

This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. If you treat your second home as a rental property, you must use the home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer.

Therefore, homeowners with mortgage insurance premiums, home equity loan interest, or home mortgage interest can potentially deduct these things from next year’s taxes. 

In most cases, you can deduct the entirety of your home mortgage interest, but the full amount depends on the date of the mortgage, the amount of the mortgage, and how you’re using the proceeds.

Interest Deduction Limits

There is a new limit to be aware of (as of the 2018 tax year) so that you can deduct the interest from your renovation home equity loan.

For married couples, mortgage interest on a total principal of up to $750,000 of your home equity loan amount can still be deducted, which was reduced from $1,000,000 pre-tax reform. For single homeowners, the magic number is now $375,000; down from $500,000. 

So as long as your loan amount doesn’t exceed these values, you can still deduct the interest paid. There are plenty of home equity loan calculators out there to help give you a better idea of what your loan amount may be.

Does HELOC Interest Tax Deduction Work the Same Way?

While home equity loans and home equity lines of credit are two different products, their interest rate deduction rules are the same. If you’re not sure about the difference between the two, you can learn more about HELOCs here, but here’s the gist: 

A home equity loan allows you to borrow a lump sum over a set period of time with a fixed interest rate, while HELOCs are a little more flexible. With a line of credit, you can access the funds on that line of credit at any time during the established draw period (usually 10 years). The HELOC also offers variable interest rates that follow market rates, unlike a fixed-rate home equity loan.

According to the IRS under Publication 936, called the “Home Mortgage-Interest Deduction,” you can deduct interest paid on home equity loans if they’re used to “buy, build or substantially improve a taxpayer’s home that secures the loan.” 

And many renovations where homeowners are using a home equity loan or HELOC meet this requirement. The home mortgage-interest deduction is a common deduction that will deduct interest from a primary or secondary mortgage (home equity loan) off of your taxes, and in most cases based on their personal circumstances, homeowners will choose which route will offer a larger deduction.

Understanding the Potential Tax Benefits of Your Renovations Loans

While home equity loans and home equity lines of credit are two different products, both home equity loan and HELOC interest tax deductible rules are the same. If you’re not sure about the difference between the two, you can learn more about HELOCs here, but here’s the gist: 

A home equity loan allows you to borrow a lump sum over a set period of time with a fixed interest rate, while HELOCs are a little more flexible. With a line of credit, you can access the funds on that line of credit at any time during the established draw period — usually 10 years. The HELOC also offers variable interest rates that follow market rates, unlike a fixed-rate home equity loan.

If you completed a home improvement project using a home equity loan or HELOC, including RenoFi Home Equity Loans and RenoFi HELOCs, or are thinking about doing so, you may be eligible for tax deductions for home improvements you’ve completed. 

Understanding Home Equity Lines of Credit (HELOC)

A HELOC is designed as a revolving line of credit secured by the home that allows you to borrow against the available equity in your home. It offers an available credit limit determined by your home’s value, the amount owed on the mortgage, and the lender’s criteria.

HELOCs in general have variable rates, meaning that your interest rates will fluctuate depending on the market as you’re paying back your loan. This is probably the biggest disadvantage because it creates the potential of having to pay back more than you expected from your lender.

The biggest advantage of using a home equity line of credit is the flexibility to access more funds as you need it (during your renovation), and a longer window to start repayment. HELOCs generally have two phases: the draw phase and the repayment phase. The draw phase generally lasts around 10 years and this is when you can access your line of credit at any time.

Deciding if a HELOC is Right for Your Financial Situation

Unlike home equity loans that offer the money in a lump sum upfront, these loans allow you to access the money as quickly and easily on an as-need basis, while only paying interest throughout this draw period (typically 10 years) until the repayment period begins.

If you know you won’t be able to begin paying back the fund immediately a HELOC is potentially a good option for you as repayments don’t start until later down the line.

Since HELOCs are more flexible, you have the freedom to tap into your line of credit at any time, taking only what you need. Those who have home improvement projects with fluctuating costs or who may need access to funds over an extended period of time may benefit most from using a HELOC.

But if you’re not the strongest at budgeting or managing debt, a HELOC may not be the best way to go. Similar to a credit card, it can be easy to overspend. And if your financial situation or the market worsens, your lender can choose to lower your line of credit, or close it all together depending on the severity of the decline.

Additionally, borrowers who have good credit scores and equity in their homes may benefit from using a HELOC because they may be able to secure a lower interest rate compared to other forms of credit, such as credit cards or personal loans.

But if you aren’t comfortable with the HELOC’s variable interest rate, a home equity loan may be able to provide the stability and predictability you’re looking for through its fixed payments. Talk to your financial advisor about your current situation and what may be in the best interest of your personal financial goals.

To learn more about HELOCs, and more alternatives to this loan, including a RenoFi HELOC or a RenoFi Home Equity Loan, contact one of our Renovation Advisors today to determine the best option for you or clic the button below.

Things to Consider When Choosing a HELOC for Your Renovation

If you’re considering a HELOC for your home renovation because of the tax benefits, there’s a couple of things you should take into account when understanding your overall expenses.

One benefit of a HELOC is that during construction (aka the draw period), you only make payments on the interest of the loan. These payments tend to be small during this draw period. But once repayment starts, you’ll start paying the principal amount as well. This transition can be drastic so it’s important to budget accordingly.

Another important thing to note: with a HELOC’s variable interest rate, the market will determine what your monthly payments are throughout the life of your loan. So as interest rates rise, your minimum payment does too. This can lead to having to pay back more than you anticipated.

In addition, a HELOC is revocable (similar to a credit card), meaning if your financial situation worsens or your home’s market value declines, your lender could decide to lower your credit line or close it. In other words, your ability to access the money isn’t always guaranteed. It requires discipline to ensure you don’t overspend.

With these things in mind, you can better understand if the tax benefits are worth the payout.

Talk to a RenoFi Renovation Advisor to learn more about your loan options , by clicking the button below 

Eligibility and Limitations: Is Interest on your Home Improvement Loan Tax Deductible?

In order to take advantage of tax deductions for your home improvements, your debt has to be secured by a qualified home. This means your primary home or your secondary home, including houses, condominiums, cooperatives, mobile homes, house trailers, boats, or similar property that has sleeping, cooking, and bathroom facilities. If you treat your second home as a rental property, you must use the home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental (whichever is longer) for your HELOC interest to be tax deductible.

Therefore, homeowners with mortgage insurance premiums, home equity loan interest, or home mortgage interest can potentially deduct these things from next year’s taxes. 

In most cases, you can deduct the entirety of your home mortgage interest, but the full amount depends on the date of the mortgage, the amount of the mortgage, and how you’re using the proceeds.

So now that you know if you can get a tax deduction on your home equity loan, you’re wondering whether or not you should. Assuming your home equity loan used for your home improvements qualifies, you’ll want to calculate your total mortgage interest after all monthly payments are made. If your deductible expenses — including the second mortgage interest payments — is higher than the standard deduction for the current tax year, it may be worth claiming.

As always, consult a tax professional to discuss your specific financial situation and whether it makes sense for you.

That’s worth doing only if your deductible expenses add up to more than the amount of the standard deduction for the 2020 tax year:

• $24,800 for married couples filing jointly.
• $12,400 for single filers or married people filing separately.
• $18,650 for head of household.

Before the TCJA of 2017, all home equity loans were tax-deductible, no matter what. Home equity loans are no longer deductible if the loan is being used for personal items like vacations, tuition, credit card debt, cars, clothing, etc.

What Tax Forms Do You Need From Your Lender?

In order to qualify, you must prove how you used the funds to claim the HELOC interest tax deduction. This includes providing receipts of all materials, labor, and other costs incurred to renovate the property, contractor contracts, and any other documentation that shows the intended use of the funds, as well as your Closing

Disclosure and mortgage deed.

• Mortgage Interest Statement Form (Form 1098). Provided by your home equity loan lender, showing the total amount of interest paid during the previous tax year. If you don’t receive this form from your lender, you should contact them.
• Statement for additional paid interest. This is only applicable if you paid more home equity loan interest than what’s shown on your Form 1098. You’ll need to write the additional interest amount paid, explain the discrepancy, and provide this statement with your tax return.
• Proof of how home equity funds were used. These receipts and invoices will show expenses that significantly improved the value, durability, or adaptiveness of your home — including costs for materials, labor fees, and home improvement permits.

Here are some other things to consider as you gather any documents you might need:

• Make a folder to save all your receipts and records for home improvements.
• If you’ve lived in your house for many years and area housing prices have been going up, a portion of your gain on sale could be taxable. If so, you can reduce the taxable gain by including the improvements in the cost basis of the house.
• If you operate a business from your home or rent a portion of your home out to someone, you may be able to write off part of your home’s adjusted basis through depreciation.

To deduct interest from loan payments, you’ll need to itemize the deductions using the IRS Form 1040 or 1040-sr. You can either take the standard deduction or itemize — but not both. After totaling these itemized expenses, compare them to your standard deduction to decide which will offer the greatest tax advantage.

The Complexities of HELOC Tax Deductions: Consulting a Tax Professional for Answers

Now that you know the answers to important questions like are home equity loans tax deductible and can you write off home renovations, the work is just beginning. The nuances that relate to each unique project and scenario are complicated and the rules may vary.

It’s crucial to talk to a qualified tax professional to make sure you know all the tax ramifications and benefits that you may qualify for before making any major decisions. This information could impact whether or not a HELOC is the right choice for your home renovations. And if it is, a professional can ensure that you maximize the benefits of all the deductions related to your project and assist you in providing all the right documentation throughout the process.

Still asking yourself, are your home repairs tax deductible? These tax professionals are the best resource you have to get the answers you need.

Should I Deduct Interest on My Home Equity Loan?

So now that you know if you can get a tax deduction on your home equity loan, you’re wondering whether or not you should. Assuming your home equity loan used for your home improvements qualifies, you’ll want to calculate your total mortgage interest after all monthly payments are made. If your deductible expenses — including the second mortgage interest payments — is higher than the standard deduction for the current tax year, it may be worth claiming. 

As always, consult a tax professional to discuss your specific financial situation and whether it makes sense for you.

That’s worth doing only if your deductible expenses add up to more than the amount of the standard deduction for the 2020 tax year:

• $24,800 for married couples filing jointly.
• $12,400 for single filers or married people filing separately.
• $18,650 for head of household.

How to Claim a Home Equity Loan Interest Deduction

In order to claim a deduction on your home equity loan interest, you’ll want to get pretty good at keeping detailed records of your expenses. Be sure to keep receipts of everything your spend throughout your home renovation project, as well as bank statements to show where the money went.

What Tax Forms Do You Need From Your Lender?

• Mortgage Interest Statement Form (Form 1098). Provided by your home equity loan lender, showing the total amount of interest paid during the previous tax year. If you don’t receive this form from your lender, you should contact them.
• Statement for additional paid interest. This is only applicable if you paid more home equity loan interest than what’s shown on your Form 1098. You’ll need to write the additional interest amount paid, explain the discrepancy, and provide this statement with your tax return.
• Proof of how home equity funds were used. These receipts and invoices will show expenses that significantly improved the value, durability, or adaptiveness of your home — including costs for materials, labor fees, and home improvement permits.

Here are some other things to consider as you assemble any documents you might need:

• Make a folder to save all your receipts and records for home improvements.
• If you’ve lived in your house for many years and area housing prices have been going up, a portion of your gain on sale could be taxable. If so, you can reduce the taxable gain by including the improvements in the cost basis of the house.
• If you operate a business from your home or rent a portion of your home out to someone, you may be able to write off part of your home’s adjusted basis through depreciation.

To deduct interest from loan payments, you’ll need to itemize the deductions using a the IRS Form 1040 or 1040-sr. Of course, you should always consult a tax professional for your personal situation.