Your home equity loan interest may be deductible if you used it to "purchase, construct or significantly remodel your house," as stated by the Internal Revenue Service (IRS).
You used to be able to deduct interest on home equity loans even if they were utilized for other financial purposes like consolidating debt or purchasing another asset before the TCJA was passed. However, the new rule restricts home equity interest deduction to costs linked to house repair.
What are the requirements for claiming the interest deduction on a home equity loan?
A duplicate of Form 1098- Your existing loan servicer should send you a form 1098 at the end of the year. You can see how much interest you paid in Box 1 by looking at the total.
A copy of your final disclosure - Three business days before closing, you'll get a disclosure of all the charges incurred while purchasing your house.
A duplicate of your loan application- Keep a copy of this, which is also known as a standardized residential loan application, on hand as further documentation that the house you acquired was your main or secondary dwelling.
Copies of receipts for house improvements - Keep your receipts, invoices, and work orders to establish that you utilized your home equity interest deduction cash to make house upgrades.
First-time mortgage interest- In addition to the interest on your home equity loan, you may deduct the mortgage interest you paid if you already have a first mortgage. With one exception, if you utilized your equity in a cash-out refinancing to borrow more than your prior mortgage required, you will not be allowed to deduct interest on that higher loan amount unless it was used to enhance your house.
Amounts added to a mortgage- A "discount point," or "mortgage point," is money paid in advance in return for a reduced interest rate on a mortgage. Mortgage points are typically deducted throughout the life of the loan, but if certain requirements are satisfied, you may be able to write them off in the year you pay them.
Gains from the selling of your house- Tax regulations enable you to retain some of the proceeds from selling your house tax-free. Individual taxpayers get a tax exemption of $250,000, while married couples are allowed to retain up to $500,000 of their sale-related earnings tax-free. This tax break is available to you if you sold your principal dwelling during the past five years and lived in it for two of those years as your primary place of residence.
Deduction for a home office- This deduction may be available to you if you can demonstrate that a portion of the square footage in your house is used for business operations. You'll have to provide proof that your home and company addresses are the same. Based on a fixed $5-per-square-foot basis, up to 300 square feet of your house may be deducted as a business deduction.