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How a home equity loan may help reduce your tax burden

Your home equity loan could offer you deductions and credits during tax season.  Getty Images

Tax season is in full swing. At this point, you've likely received your W2s, 1099s and any other tax documents that you need to file your taxes. 

And, you may have started to think about the deductions you'll be able to take on this year's return, too. After all, the more deductions you can take, the better your tax bill is likely to be. 

But did you know that if you've recently taken out a home equity loan, you may qualify for even more deductions? And, if you take out a new home equity loan this year, you may be able to substantially reduce your 2024 tax burden when it's time to file next year. 

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How a home equity loan may help reduce your tax burden

"Home equity loans are commonly used to consolidate high interest debt or make home improvements on a homeowner's existing residence," says Bill Banfield, executive vice president of capital markets at Rocket Mortgage. "What people might not know is that home equity loan interest can be tax deductible, depending on how the funds are used and the specific conditions set by the IRS."

So, how can you make sure that your home equity loan interest is tax-deductible? And are there other ways home equity loans can bolster your tax refund? Here are a few tax advantages you could get with your home equity loan: 

Tax deductions for home improvements

"Interest on a home equity loan is tax deductible if the money is used on renovations that substantially improve the home," says Banfield. 

So, if you use the money you borrow with a home equity loan to improve your home, you may be able to write off the interest you pay on the loan as a tax deduction. However, there is a caveat: 

"In order to be deductible, the money must be spent on the property from which the equity loan is sourced," says Banfield. 

In other words, you won't be able to write off your home equity loan interest if you take the loan out on your primary residence and use it to renovate your vacation home. 

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Tax deductions for building or purchasing a new home

Home renovations aren't the only way to reap the tax benefits of a home equity loan

"Interest incurred on a home equity loan can be deductible on the taxpayer's Schedule A of the 1040," says Paul T. Joseph, attorney, CPA and founder of Joseph & Joseph Tax & Payroll. "The proceeds from the loan must be used to either purchase a home, build a home or make improvements to your existing home." 

So, if you use a home equity loan to purchase or build a new home, you should be able to deduct the loan's interest on your tax return. 

Tax deductions for energy-efficient upgrades

Those aren't the only way to enjoy tax benefits associated with a home equity loan. 

The United States tax code includes several write-offs for energy-efficient home upgrades. For example, you may be able to access additional tax credits for installing energy-efficient windows and doors, improving your home's insulation and more. You may also be eligible for a tax credit worth up to 30% of the cost of a new solar system as long as you install it before 2032, according to the U.S. Department of Energy

So, when you use your home equity loan to make energy-efficient renovations to your home, you could take advantage of multiple incentives: your home equity loan interest deduction and your energy efficiency-related tax credits. 

The bottom line

Your home equity loan could be a secret weapon in your effort to reduce your tax burden. If you've already taken out your loan, consider how you used the money and whether you'll be able to take advantage of the tax benefits mentioned above. If you plan on taking out a home equity loan soon, consider using the money you receive in a tax-advantaged way to bolster your tax return in the next filing season. 

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