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January can be a smart time to improve your finances. The holidays are over, big spending is halted and, right now, there are multiple ways to maximize your savings. But if you borrowed money last year, there are also some critical steps to take now, ahead of the busy tax filing season. And this doesn’t just apply to the mortgage interest tax deduction. If you borrowed from your home’s equity via a home equity loan or home equity line of credit (HELOC), or intend to do so in 2025, it’s important to know how it could affect your tax bill. Below, we’ll break down what to know before April 15, 2025.
See how your home equity loan could qualify as a tax deduction here.
Tax benefits home equity loan borrowers should remember
One of the biggest benefits of a home equity loan or HELOC, besides the lower interest rate and access to a six-figure sum of money, is the potential tax deduction. Specifically, interest paid on both products could be deducted from your tax bill for the year in which it was used, if the funds were used for eligible home repairs and projects.
“Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan,” the IRS notes on its website. “The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.
“Generally, you can deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a,” the IRS goes on to explain. “However, any interest showing in box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by the property, is not deductible if the proceeds were not used to buy, build, or substantially improve a qualified home.”
According to the IRS, if the funds borrowed were used to “substantially improve” your existing home, you may qualify for the deduction. What types of home projects fall under that definition, however, vary. So you should consider speaking to both your home equity lender and a tax professional who can better determine your eligibility. And the deduction will be specific to the year in which it was used. So if you applied for a home equity loan or HELOC in the closing weeks of 2024, but only started using the funds in 2025, you won’t qualify for the deduction until you file your next tax return in 2026.
Learn more about how home equity loans can reduce your tax bill here.
Other home equity loan tax benefits to know now
A potential major tax deduction isn’t the only benefit to borrowing with a home equity loan. Here are three other benefits prospective borrowers should know now:
- A large amount to borrow from. The average home equity amount is currently $320,000. And while most lenders will require you to keep a 20% equity amount as a buffer untouched, that still leaves you a six-figure sum of money to withdraw from.
- A lower interest rate. Home equity loan and HELOC interest rates steadily declined for all of 2024. And HELOC interest rates, in particular, just fell to their lowest level in 18 months. That makes both options much easier to repay than credit cards (with rates close to 23%) and personal loans (with rates around 12%) now.
- Flexibility in terms of rate structure. If you want a low, fixed interest rate without having to worry about additional rate changes, a home equity loan offers that security. But if you want a variable interest rate that can drop even further as additional rate cuts are issued, a HELOC can be more applicable. Either way, borrowers will have flexibility in terms of rate structure, making this a key feature in today’s evolving rate climate.
The bottom line
Interest paid on both home equity loans and HELOCs qualifies to be deducted from your taxes if used for eligible home repairs. So if you used either product in 2024, be sure to explore this potential benefit before filing your return in the weeks and months ahead. Combined with the other features that can be especially helpful in today’s economy, now may be a smart time to borrow from your home equity. Just remember that some of these features are only available because your home functions as collateral, so you’ll want to restrict any borrowing to an amount you can comfortably afford to avoid losing your home to the lender in the exchange.