Key takeaways
- Unsecured home improvement loans are generally not tax deductible.
- Interest from home equity loans and HELOCs may be tax deductible.
- However, you must use them for major projects like home office improvements, medical-related home renovations and energy-efficient isntallations.
Home improvement loans generally aren’t eligible for federal tax deductions, even when used for eligible renovations or property improvements. Unlike home equity loans, which can be tax deductible, home improvement loans are unsecured debt, rendering them ineligible for tax deductions.
Is home improvement loan interest tax-deducible?
As a rule of thumb, if your home or property doesn’t back the loan, it doesn’t qualify for the tax deduction. If you’re looking to finance a specific renovation and want to claim a tax deduction consider a home equity loan or line of credit.
Home improvement personal loans
A home improvement loan is offered by online lenders, banks or credit unions and functions as a personal loan. Borrowers must meet the lender’s requirements to get approved and receive the funds in a lump sum. While lenders typically require good credit, some provide bad credit home improvement loans.
Most lenders offer repayment timelines between two and five years and can come with fixed or variable interest rates based on your creditworthiness.
Unsecured loans or debts (like personal loans for home improvements) aren’t secured by a house or property. Therefore, they’re not eligible for the tax credits, even if the funds are used for eligible projects or improvements.
Home equity loans
A home equity loan is a type of second mortgage that allows you to borrow against the equity — the portion of the home you’ve already paid off — built up in your home. They typically have fixed interest rates and repayment terms of up to 30 years.
How much you can borrow will depend on the lender and how much equity you’ve built up over time. However, many lenders cap the amount you can borrow between 80 to 85 percent of your home’s equity.
If used for projects to substantially improve your home, you may be able to deduct the interest from your loan on your taxes, even if only a portion of the balance went toward the home.
Keep in mind that these loans and lines of credit tend to have stricter usage restrictions and are higher risk. If you fail to make the payments, you run the risk of losing your home.
Home Equity Lines of Credit (HELOCs)
HELOCs also allow you to borrow against the equity you’ve built up over time, but rather than dispersing the amount in a lump sum, a HELOC allows you to withdraw funds over time.
Borrowers can take out how much they need when they need it. The interest is eligible for a tax deduction when used for eligible projects. Because of this, HELOCs can be a great way to finance an ongoing home improvement project.
Deduction-eligible home equity loan uses
Not all home improvement projects qualify for a tax deduction, even if you use a home equity loan for financing. It’s not likely that you’ll see any interest deducted for smaller projects, like updating your kitchen cabinets or installing a patio.
The IRS has specific parameters around what qualifies as eligible. Check the specific home improvement details and deadlines before banking on a significant return this tax season. Also, refer to IRS Publication 936 for additional guidance.
Home office deductions
If your residence is your primary workspace, you may be able to deduct certain home office improvements or purchases. This applies to homeowners and renters residing in any home or utilizing a free-standing structure for their business. Employees will not qualify, even if they meet the other requirements.
The term “home office” is more of an umbrella term as personal property also may qualify. Among others, boats, RVs, mobile homes and unattached garages, studios or barns fall under this category if used strictly for business.
In order to qualify, the IRS states that:
- You must use a specific part of your home strictly for business purposes.
- Your home (or structure) is your principal place of business, or if administrative tasks can only be performed on your property.
If you work on a hybrid schedule and only work from home a few times a week, it likely won’t qualify. “If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home,” an IRS resource page reads.
Medical-related home renovations
The installation of specialized household equipment for medical care to support you, your spouse or your dependent may qualify for a tax break, but only if the additions fall within certain parameters.
For example, the value of the property must not be increased by the renovation for the entire cost to be considered a taxable medical expense. Such improvements may include:
- Widening hallways and doorways.
- Adding ramps or lifts to accommodate for a wheelchair.
- Modifying stairwells.
- Lowering (or modifying) kitchen appliances, cabinets or household electrical outlets.
Any amount paid (or borrowed) for medical upkeep and operation also qualifies as long as the funds are used strictly for medical purposes and the installation of a specialized plumbing system for a person with a disability.
If you’re unsure whether your renovations qualify, consider the primary function of the addition and the potential value-add it gives your home. “Only reasonable costs to accommodate a home to your disabled condition are considered medical care,” the IRS tax resource reads. “Additional costs for personal motives, such as for architectural or aesthetic reasons, aren’t medical expenses.”
Energy efficient installations
If you’ve installed energy-efficient equipment — think solar panels, energy-efficient windows, skylights and doors, biomass equipment or small wind turbines — you may qualify for a tax break on your next return.
Also called the residential clean energy property credit, qualifying eco-friendly renovations made after Dec. 31, 2021, and before Jan. 1, 2033, are eligible for a tax credit totaling up to 30 percent of the equipment costs. Any expenditure made in 2033 can result in a 26 percent maximum tax credit and a 22 percent maximum credit for property placed in 2034. There will be no credit available for renovations made after Dec. 31, 2034.
What constitutes a qualifying cost when calculating the deduction percentage will vary based on the type of eco-friendly equipment you’ve had installed. There’s also a $1,200 aggregate yearly tax credit maximum for home components, energy audits and energy property, while qualifying heaters, stoves and boilers have a separate $2,000 limit.
Are repairs tax-deductible?
Repairs include routine home maintenance and other items that must be fixed on your home to prevent its condition from deteriorating. They aren’t tax-deductible, as maintenance is an expected cost that comes with owning a home.
How to claim a home equity loan tax deduction
Here’s how to claim your interest deduction on a home equity loan at tax time:
- Gather your tax documents. You’ll need to have a copy of Form 1098 (Mortgage Interest Statement Form) handy, along with a written record of any other interest paid not reflected on the form.
- Collect proof of expenditures. Compile any invoices, receipts or other documents that show how the home equity loan proceeds were spent. Be sure to only include those expenditures that contribute to the improvement of your property’s adaptability, value or longevity.
- Itemize your deductions. When preparing your return, be sure to itemize your deductions, assuming they exceed the standard deduction for the respective tax year. If they don’t, Consider soliciting the help of a tax professional if you’re unsure how to do so.
The bottom line
Although home improvement loans aren’t tax deductible, interest on secured loans used for home improvement may be. You could get a break at tax time with a home equity loan or HELOC by deducting interest on the funds used to substantially improve your property. Speak with an accountant or tax professional to learn more about tax implications of these loan products.
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