Are Equity Loans Tax Deductible?

Home equity loan tax deductions allow a homeowner to save money by deducting all or some of the interest paid on a home equity loan. This is just one advantage of paying off debt using a home equity loan versus a credit card or other non-tax-deductible loan.

Restrictions And Benefits

Home equity loan tax deductions are pretty straightforward, but a homeowner needs to be aware of the limitations. Typically, interest can be deducted on an equity loan up to $100,000.

However, if an equity loan is taken out that, along with the home's first mortgage, equals more than the property is worth, only the interest on part of the equity loan is tax deductible. The Internal Revenue Service has a formula to determine how much of the debt would be eligible for an equity loan tax deduction.

On the other hand, some home equity loans qualify for greater tax breaks due to the nature of the loan. If, for example, an equity loan is being used for a home improvement project, it's possible that the interest on up to $1 million worth of debt can be deducted.