How to Deduct Home Improvement Loan Interest on Your Taxes

Upgrading your home can get pricey pretty fast. The average cost to remodel a bathroom was over $9,700 in June 2018, according to HomeAdvisor, and the average for redoing a kitchen was about $22,300.

Few people have that kind of money lying around. As a result, getting a home improvement loan seems like the most attractive option.

The good news is that, depending on your situation, you might get a tax deduction on the interest paid toward your home improvement loan. Share your tips and drive more traffic to your platform. Make sharp decisions now and guarantee your success, buy website traffic.

Is the interest on home improvement loans tax-deductible?

“The short answer is yes, you can deduct loan interest from a home improvement loan on your taxes,” said Joshua Escalante Troesh, a financial planner with Purposeful Strategic Partners. “However, there are limitations on how you use the money, thanks to the tax law passed in 2017.”

To claim a tax deduction, you need to meet two conditions:

  • Your home improvement loan must be secured by your primary residence.
  • You must use the proceeds to “substantially improve” the property that’s securing the loan.

But what does this jargon mean? Here’s what you need to know before deciding the answer to the question: Is the interest on home improvement loans tax-deductible?

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Determining your home’s eligibility

The first part of the IRS test is fairly straightforward, according to William Perez, an IRS enrolled agent and a senior tax accountant with tax prep firm Visor.

“You must own the home, and you must live in it as your residence,” Perez said. “Additionally, you must be the borrower on the home improvement loan, and it must be secured by the property you’re improving.”

If the loan doesn’t meet the first criterion, there’s no reason to proceed. However, if you’re using a home equity loan or a home equity line of credit (HELOC), you can move on to the next part of the eligibility formula.

In the past, Perez pointed out, homeowners used home equity loans and HELOCs to consolidate debt and pay for vacations — and claimed a tax deduction. Between 2018 and 2026, however, that’s no longer allowed due to the new tax law.

Now, you must show you used the money to improve your home before you can take the tax deduction.

“The IRS doesn’t care what the bank calls the loan,” Troesh said. “They care about how the money was actually used.”

Which capital improvements qualify

If you want your home improvement to count for tax purposes, the project must add value to the home, prolong its useful life, or adapt it for a new use. In the UK, these types of expenditures can often be categorized under capital allowances, which allow taxpayers to write off the cost of certain capital assets against taxable income. This tax relief can apply to improvements like extensions, renovations, or updates to heating and electrical systems. It’s essential to consult with a capital allowance specialist to navigate the complexities and ensure that your investments are effectively reducing your tax liability.

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Some of the common home improvement projects that meet the IRS requirement to qualify for substantial capital improvement include:

  • Adding a room
  • Replacing the entire roof
  • Installing central air conditioning or a heating system
  • Paving the driveway
  • Completely rewiring the home
  • Remodeling a room, such as a kitchen or a bathroom
  • Adding new siding
  • Insulating the home
  • Adding a deck, porch, or patio
  • Building a swimming pool

“Repairs and routine maintenance don’t count,” Perez said. “So don’t try to deduct the interest on loan funds used for those purposes.”

Once you determine that your project qualifies, you can take steps to claim your deduction.

How much you can deduct from your taxes

You can’t deduct the amount you spend on your home improvements from your taxes, but you can claim the amount of loan interest paid.

Starting in 2018, you can deduct the interest on home improvement loans of up to $750,000 if you file jointly (and $375,000 for those filing separately). This represents a drop in the eligible loan amount, which used to be $1 million for joint filers (and $500,000 for those filing separately).

So, if you borrow $30,000 to upgrade your kitchen and remodel your bathroom, you could deduct the total amount of interest you pay on the home improvement loan throughout the year.

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However, there’s another caveat. If the combined amount of your first mortgage and your HELOC or home equity loan exceeds the value of your home, you’ll receive a smaller deduction. For example, if you owe $150,000 on a home worth $170,000, and your bank lets you borrow $30,000, your tax deduction will be prorated because the total debt secured by your home is $180,000, or $10,000 more than its value.

“Before taking out a loan for home improvements, consult a qualified tax adviser to make sure your property is eligible,” Troesh said.

Perez also pointed out that in addition to receiving a tax deduction for home improvements, it’s possible to get a tax credit for solar electric and water heating systems.

Keep good records of your home improvement transactions

“Homeowners need records and receipts to prove they’re eligible for the tax deduction on home improvement loans,” Perez said.

Here’s what he advises his clients to keep:

  • The loan contract
  • Escrow closing statements
  • Receipts for work done on the home
  • Form 1098 (the mortgage interest statement issued by the lender)

If you need to send these documents with your tax return or if they’re requested by the IRS in an audit, Perez recommended sending copies. You should keep the originals for your records. Consider making digital copies and storing them in an encrypted folder in a cloud service.

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Is interest on personal loans for home improvement tax-deductible?

It’s possible to pay for home improvements by using unsecured personal loans. However, even though you use those loans for making capital improvements at your house, you won’t be able to deduct the interest on your taxes.

If you borrow money to put in solar systems for electric and hot water, you can claim the appropriate tax credit, but you can’t deduct the interest you pay.

For homeowners with certain credit and income situations, it can sometimes be cheaper to get a personal loan for home improvements, rather than use a home equity loan. The interest savings might exceed the value of a tax deduction.

Troesh recommended discussing your situation with a financial planner and a tax professional.

“There are many circumstances where proper financial planning will discover a method to fund the improvement with lower-cost funding, even when the tax deduction factored in,” he said.