Are home improvement loans tax deductible?

Home improvement loans generally do not qualify for federal tax deductions, even if they are used for qualifying renovations or improvements to property. Unlike home equity loans, which can be tax deductible, home improvement loans are unsecured debts, making them ineligible for tax credits.

Home improvement loans versus home equity loans

While home improvement and home equity loans may seem the same on paper and can be used for the same purpose, it is important to understand the differences between the two categories.

If you use a home improvement loan to finance your next project instead of a home equity loan, you could be leaving thousands of dollars in tax deductions on the table.

Home improvement loans

A home improvement loan is offered by online lenders, banks or credit unions and functions like a personal loan. Borrowers must meet lender requirements to be approved and receive the money in a lump sum. While lenders typically require good credit, some lenders offer home improvement loans.

Most lenders offer repayment terms between two and five years and can charge fixed or variable interest rates depending on your creditworthiness. Basically, home improvement loans are unsecured personal loans marketed specifically to borrowers looking to finance renovations.

Unsecured loans or debts (such as personal home improvement loans) are not secured by a home or real estate. Therefore, they are not eligible for the tax credits, even if the funds are used for eligible projects or improvements.

Mortgage loans

Home improvement loans and home equity loans fall into two different categories for a number of reasons. First, loans on the equity in your home are secured – backed by the house – and allow you to take advantage of the equity you’ve built in your home over time.

Also called a “second mortgage,” these loans and lines of credit typically have stricter usage restrictions and involve higher risk. If you don’t make the payments, you risk losing your home. Home equity loans and lines of credit (HELOCs) are some of the most popular secured debts and are eligible for tax deductions.

Home loans that are tax deductible

As a rule of thumb, if your home or property doesn’t support the loan, you won’t qualify for the tax interest deduction. However, if you want to finance a specific renovation, consider a home equity loan or line of credit.

Mortgage loans

With a mortgage loan you can borrow against the equity (the part of the home that you have already paid off) that you have built up in your home. They typically have fixed interest rates and repayment terms of up to 30 years, but most lenders allow the borrower to choose a repayment plan.

How much you can borrow depends on the lender and how much equity you have built up over time. However, many lenders limit the amount you can borrow to between 80 and 85 percent of the equity in your home.

If you use the money for projects to significantly improve your home, you may be able to deduct the interest on your loan from your taxes, even if only a portion of the balance goes toward the home.

Home Equity Lines of Credit (HELOCs)

HELOCs also allow you to borrow against the equity you’ve built up over time, but instead of distributing the amount all at once, a HELOC allows you to withdraw money over time.

Borrowers can withdraw the required amount at the time they need it. The interest qualifies for a tax credit when used for qualifying projects. Because of this, HELOCs can be a great way to finance an ongoing home improvement project.

Home equity loans eligible for deduction

Not all home improvement projects qualify for tax deductions, even if you use a home equity loan to finance it. Interest is unlikely to be deducted for smaller projects, such as updating your kitchen cabinets or installing a patio.

The IRS has specific parameters around what qualifies. Check the specific details and deadlines for home improvements before counting on a significant return this tax season.

Home Office Deductions

If your home is your primary workspace, you may be able to deduct certain home office improvements or purchases. This applies to homeowners and renters who live in a house or use a detached structure for their business. Employees are not eligible even if they meet the other requirements.

The term “home office” is more of an umbrella term, as personal property may also qualify. Boats, campers, mobile homes and detached garages, studios or sheds, among others, fall into this category if they are used exclusively for business.

To qualify, theirs says that:

• You must use a certain part of your home strictly for business purposes.
• Your home (or building) is your main place of business, or if administrative tasks can only be carried out on your plot.

If you work a hybrid schedule and only work from home a few times a week, this likely doesn’t qualify. “If the use of the home office is merely appropriate and useful, you cannot deduct the costs for the business use of your home,” said one IRS resource page is reading.

Medically related home renovations

The installation of specialized home medical equipment to support you, your spouse or your dependents may qualify for a tax credit, but only if the additions fall within certain parameters.

For example, the renovation may not increase the value of the property, otherwise the entire cost will be considered taxable medical expenses. Such improvements may include:

• Widening of corridors and doorways.
• Adding ramps or lifts for a wheelchair.
• Adjust stairwells.
• Lowering (or adjusting) kitchen appliances, cabinets or sockets in the home.

Any amount paid (or borrowed) for medical maintenance and operations is also eligible, as long as the funds are used solely for medical purposes and for the installation of a specialized plumbing system for an individual with a disability.

If you’re unsure whether your renovation qualifies, consider the primary function of the addition and the potential value it brings to your home. “Only reasonable costs to adapt a home to your disabled condition are considered medical care,” the IRS says tax source is reading. “Additional costs for personal reasons, such as architectural or aesthetic reasons, are not medical costs.”

Energy-efficient installations

If you have installed energy-efficient equipment – ​​think solar panels, energy-efficient windows, skylights and doors, biomass equipment or small wind turbines – you may be eligible for a tax credit on your next tax return.

Also called the residential credit for clean energy, eligible environmentally friendly renovations made after December 31, 2023 and before January 1, 2033 are eligible for a tax credit of a total of up to 30 percent of the equipment costs. Any expenses incurred in 2033 could result in a maximum tax credit of 26 percent and a maximum tax credit of 22 percent for properties listed in 2034. No credit will be available for renovations completed on December 31, 2034.

What constitutes a qualifying expense when calculating the deduction percentage depends on the type of environmentally friendly equipment you have installed. There is also a total of $1,200 in annual tax credits for home components, energy audits and energy ownership, while qualifying heaters, stoves and boilers have a separate limit of $2,000.

What is better: home equity or home improvement loans?

While there is no “right” answer to which product is better, there are projects that are better suited to certain projects. For example, home improvement loans are best for smaller projects that don’t qualify for tax deductions, especially if you haven’t built up significant equity.

For larger and longer renovations, HELOCs may be the better option for eligible borrowers. Home equity loans are great for long-term homeowners with less strenuous projects that qualify for tax credits.