Can You Deduct Interest On Home Improvement Loans

Are home improvement loans tax deductible?

You can deduct both the interest accrued for your home improvement loan as well as points from your taxes. Points are simply the non-interest costs you incur to take out the loan, also known as origination fees.
As a homeowner, it's important to understand the tax implications of any home improvement projects you undertake. Many people are surprised to learn that they can deduct the interest on home improvement loans from their taxable income.

What home improvements are tax deductible?

Only significant improvements are tax deductible – again, routine repairs are not. You're looking at things that increase your home's overall market value, like putting on a new roof, doing an expansion, remodeling a bathroom or kitchen, or even installing a swimming pool.
According to the Internal Revenue Service, a home repair is a "modification that restores a home to its original state or value." These are not tax deductible, except for home offices and rental properties (for which different procedures and exclusions apply). If you're fixing broken window panes or repairing a few shingles on the roof, these don't qualify.
Home improvements must increase the value of your home. These include things like:
Adding insulation to the attic
Installing a new, upgraded septic system
Adding built-in appliances
Putting in solar panels or small wind turbines
Replacing windows or doors with ones that are Energy Star Efficient
Home improvements for medical care (like exit ramps)
Home office improvements
Installing new siding, a new roof, or a new driveway
...and so on.
If you are selling your home, you can only deduct improvements that were made in the year the home was sold, in some cases.

What is the home mortgage-interest deduction?

The home improvement loan deduction is a bit different than the home mortgage interest deduction, which is allowing you to claim money that was spent simply on paying the interest fees for the mortgage of your home rather than for any home repairs. It can lower your taxable income and reduce the amount of taxes you owe. It can also be used for second homes, within certain limits.
The maximum deduction for home mortgage interest is on the first $750,000 if married and filing jointly or $375,000 if filing separately. There are higher limitations if you are deducting mortgage interest from debt that was acquired prior to December 2017.
These can't always be deducted, but if you meet the following requirements they can:
The loan has to be secured by your home
Points have to be charged
These points can't be at a higher rate than what is the typical rate for your area and the time
You must use the cash method of accounting, for which you can find more details here
You can't have borrowed money to cover the cost of paying for those points
If you pay interest in advance for a period that goes beyond the end of the tax year, you have to spread the interest over the tax years to which it applies
Other terms and limitations may also apply, according to this IRS resource.

How do you qualify for home mortgage-interest deduction?

To qualify for home mortgage interest deduction, you must have a home loan to build, buy, or improve your home. This loan can be a:
Mortgage
Home equity loan
Line of credit
Second mortgage (in some cases)
Refinanced home (in some cases)
You must also have paid interest on a loan related to purchasing, building, or improving your primary home and be paying income taxes (obviously) for that set year.
You may even be apply to deduct home mortgage interest if:
You rented out part of your home
You were a co-op apartment owner
The house was a timeshare
It was under construction during the year
Part of the proceeds of the mortgage were used to pay down debt or invest in a business
The home was destroyed or heavily damaged during the year
You divorced or separated and either of you is continuing to pay the mortgage (the interest often serves as alimony)
You and someone else (like an unmarried partner) paid mortgage interest on the house
The rutles do get more complex in these sorts of situations – you will want to consult IRS Publication 936 for more information or talk to a tax professional. In any event, it's a good idea to keep good documentation and records of all income, expenses, and square footage involved.

What counts as a qualified home for tax deductions?

Technically, any residence can be a home – but not according to the IRS. In order to qualify as a home for tax deductions, your home must:
Serve as collateral for the loan (in other words, what's at stake if you do not pay back the loan)
Be a house, condo, apartment, co-op, mobile home, houseboat, or house trailer
Have separate sleeping, toilet, and cooking facilities
Your home can be one that you get in order to "buy out" an ex-partner's half of the house in a divorce. If you get a nontaxable housing allowance from military or ministry service, that can also serve as a qualified house.
For a second mortgage(or rental property) you wish to claim tax deductions for, the above situations apply. The home does not have to be used for the entire year. However, you have to be there for whichever is longer – 14 days or 10% of the number of days you rented it out.

What are the deduction limits on interest?

In 2017, the Tax Cuts and Job Act changed the individual income tax dramatically. This act lowered the limit for mortgage deductions and also capped the amount that you are allowed to deduct from a debt for a home equity loan.
Before this act, the limit was $1 million, but now, as mentioned earlier, it is $750,000 (for married couples).
The exceptions to this rule are as follows:
Mortgages taken out prior to 1987 are grandfathered and not limited – all interest is fully deductible, regardless of how much
Mortgages for homes purchased between 1987 and 2017 are still eligible for the $1 million limit
Homes that were sold prior to April 1, 2018 are still eligible for the $1 million as long as there was a legal and binding contract entered before December 15, 2017 and closed before January 1, 2018

How do home improvement loans work?

Home improvement loans generally refer to unsecured personal loans that are meant to pay for home renovations and significant upgrades. They can take a variety of forms, including:
General personal loans
Cash-out refinance loans
Home equity line of credit
Home equity loans
Government loans
These loans can provide you with the money you need to repair damage, upgrade your facilities, or build an addition. Again, though, in order to be deductible, the home improvement expenses must contribute to an increase in the value of your home. Basic repairs don't cut it.

How is interest paid on home improvement loans?

Depending on the lender and the repayment terms, the way you pay the interest will vary. Usually, you'll pay a fixed interest rate along with a monthly payment over a set number of years.
Some types of home improvement loans have additional stipulations or caveats attached. For example, with a home equity line of credit, also known as a HELOC, you have a draw period of around 10 years (this varies) when you can use some or all the funds you were approved to borrow.
During these ten years (or however many it actually is), you can make interest-only payments. You'll repay the interest and principal later, during the repayment period.

Are home improvement loans considered taxable income?

No, not necessarily. Your taxable income is the portion of your gross income that is subject to taxation (how much money you earned in a given year). When you borrow money from a lender or bank – like for a mortgage, student loan, or of course, a home improvement loan -they aren't considered income. Income, according to the IRS, is money you earn from a job or an investment.
Not only are these loans not considered income, but they typically are not taxable. As an added bonus, you can get that deduction in most cases, as we mentioned above.

When is interest tax deductible?

Tax-deductible interest is any borrowing expense that you can claim on a state or federal income to reduce your taxable income.
Mortgage interest is one example. Other examples include:
Mortgage interest for second homes or investment properties
Interest from home improvement loans
Student loan interest
Interest on business loans (including business credit cards)

When is interest paid not tax deductible?

There are limits to the amount of paid interest that is tax-deductible. Some of this has to do with your marginal tax rate, also called your tax bracket.
For mortgage interest or interest on home improvement loans, it gets a bit trickier. Any interest payments on your mortgage can be claimed as a tax deduction and will be reported on Form 1098, also known as the Mortgage interest Statement. Here you'll report how much you paid in mortgage interest during the tax year. You'll receive this form from your lender prior to filing your taxes.
Your interest is not tax-deductible if you choose not to itemize your deductions. A return has to be itemized in order to qualify.
It is also not tax-deductible if it is not real property.
Personal interest, besides home mortgage interest and interest on student loan debt, is not tax-deductible. For example, if you put a hefty home improvement project on your credit card and think you can use the credit card interest as a tax deduction – think again. This isn't going to happen.

Is interest paid on debt tax deductible?

Although you can take a tax deduction for some types of interest payments, not all interest paid will qualify.
Again, mortgage interest and refinanced mortgage interest is usually deductible. The same goes for if you take out a home improvement loan or home equity line of credit. You can also deduct the interest on the mortgage for your second home that way, provided that it has separate cooking, sleeping, and toilet facilities, as mentioned above.
It is not deductible if you have a very expensive home ($750,000 plus) or if you refinance your home for more than the initial balance and the money isn't used to buy, build, or improve your home.
The following types of interest paid on debt is NOT tax-deductible, either:
Money borrowed to invest in straddles, tax-free securities, or passive activities
Interest on overdue taxes or money borrowed to pay taxes
Interest on more than two homes
Personal interest (for personal loans that aren't used for home improvement or for credit cards)
Auto loans
The only exception here is credit cards – if you have a business credit card, you may be able to deduct interest there if the money was spent on business expenses.

Can you deduct personal loan interest on your taxes?

In most cases, no. You may be able to deduct personal loan interest on your taxes if it funded a qualified educational expense or student loan, if it funded certain business expenses, or if it funded a home improvement.
For example, if you buy a car for your business with a personal loan, you may be able to deduct some of that interest.
You can also receive a deduction if you applied for a personal loan to invest in an LLC, S corporation, or partnership. These deductions are complicated, though, so it's wise to get in touch with an accountant if you have questions.
Student loans are a type of personal loan that is tax-deductible – again, credit cards and personal loans for things like vehicles, vacations, or minor home repairs are not tax-deductible.

What kind of personal expenses are tax-deductible?

There aren't that many personal expenses that are tax-deductible, but being aware of what they are can help you save some money at tax time. If you qualify, that is!
You can deduct:
Mortgage interest
State and local taxes, including property taxes or state income and sales taxes, whichever is greater
Charitable donations
Medical expenses and health savings accounts
401(k) and IRA contributions
Education expenses (like a college savings plan)
STudent loan interest (up to $2,500 per year for the life of the loan)
And of course, you can usually deduct home improvement loans as tax expenses, too.
The bottom line is that home improvement loans are a great way to finance your remodeling project. If you're considering taking out a loan, be sure to follow these tips so you can get the most benefit from the deduction.