When you purchase a home using a mortgage, you steadily make payments to gain equity in the home until you own it outright. Home equity loans provide funding to individuals using any property equity they have as collateral. In some cases, the interest you must pay on these loans is deductible, which lowers your overall tax burden. Here’s how to tell whether your loan qualifies, as well as the steps to take if you’d like to claim this deduction.
Criteria for Deducting Home Equity Loan Interest
To deduct home equity loan interest, the funds received must have been used to renovate or improve the property in some manner. While there is no definitive listing of renovations or improvements that homeowners can look to for insight, a roof replacement, remodeling a kitchen or bathroom, adding another room, and upgrading your heating and cooling system all qualify.
How to Claim a Deduction
If you’ve determined that you’re eligible, you’ll need to itemize, as opposed to taking the standard deduction, to claim it. In 2020, the standard deduction will be $12,400 for singles, $18,650 for heads of household, and $24,800 for married couples filing jointly. Therefore, if your combined itemized deductions don’t add up to the same value, it is not worth pursuing. Also, you’re only allowed to deduct interest on qualified loans up to $750,000.
If you do choose to itemize, keep any receipts or invoices on the work completed at your home so that you can prove what was done in case of an audit.
You will fill out form 1040, referencing IRS Form 1098, which the government should have mailed to you; it details the interest you paid on your mortgage and home equity loan for the previous year.
When looking for a home equity loan, work with a trusted financial institution. For more than six decades, Estacado Federal Credit Union has helped its members achieve their dreams through their reasonable financial products. When it comes to home equity loans, you may be eligible for up to $200,000 depending on your home’s equity. Call this Hobbs, NM, credit union at (575) 393-1596 to schedule an appointment, or visit the website to begin your application.