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Are you planning some home improvements this year? Here’s what to know about the HELOC tax deduction and how to take advantage of it.

Is HELOC interest tax deductible?

The interest you pay on a HELOC can be tax-deductible — but not always. It all depends on what you use the funds for.

According to the IRS, you can only deduct the interest you pay on a home equity loan or line of credit if “the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.”

You may also be able to deduct a portion of any discount points you pay on your HELOC (if any). Again, though, this is only if you use the credit line to buy, build, or substantially improve your home.

What qualifies as a substantial home improvement?

“Buying” and “building” a home are pretty straightforward terms, but what exactly does “substantially improve” your home mean? Luckily, the IRS lays it out pretty clearly.

According to the agency, a home improvement is considered “substantial” — and qualifies you for a write-off — if it:

• Increases your home’s value

• Prolongs the lifespan of your home

• Adapts your home to a new use

Regular maintenance and fixing wear-and-tear issues don’t fall under the “substantial” umbrella, according to the IRS. As the agency explains in its mortgage interest deduction guide , “Repairs that maintain your home in good condition, such as repainting your home, aren’t substantial improvements. However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements.”

How to deduct your HELOC interest on your tax return

If you do use your HELOC to buy, build, or substantially improve your house, then you can deduct that interest from your taxable income.

To do this, you’ll need to:

1. Make sure your HELOC qualifies.

You can only write off mortgage interest on debts up to $750,000. So, if your total mortgage debts go beyond this amount, you won’t be able to deduct any interest paid on the overage.

You will also need to be sure your house qualifies. This means it must be your primary residence or second home, and it must be the home that secures the HELOC.

2. Get your documentation together.

Before you can file your returns, you will need a 1099-INT form from your lender.

“Your bank should send you a 1099-INT at the beginning of the year,” says Kari Brummond, a tax preparer for Tax Cure. “This shows how much interest you paid during the previous year.”

You’ll need a total for any HELOC funds used to buy, build, or improve your home , too, so gather any receipts or contracts you have for the work done or materials purchased. Then, total these up. (You don’t need to send these in with your return, but make sure to keep them on hand in case you’re ever audited).

3. Itemize deductions

To take line-item write-offs like mortgage interest, you need to itemize your returns, which requires a Schedule A.

“You will note the 1099-INT amount on your Schedule A along with mortgage interest from your primary or secondary homes, plus any other itemized deductions you claim,” Brummond says. “You don’t have to send the 1099-INT to the IRS, but you should keep it for your records.”

Benefits of using a HELOC to improve your home

Aside from the tax season savings it can come with, there are other reasons a HELOC might be a smart option to explore if you’re looking to update your house right now.

For one, homeowners are sitting on record amounts of equity . Between the fourth quarters of 2021 and 2022, the average owner earned about $14,300 in home equity. In total, the typical homeowner now has an equity stake of around $270,000.

If you need cash, HELOCs can be a good way to make use of this equity and avoid using financial products like credit cards or personal loans , which usually result in more interest costs in the long run.

HELOCs are also a good alternative to cash-out refinancing right now for the same reason. If you’re one of the many homeowners who has a 2% to 4% rate on your main mortgage, refinancing now may not make sense, as it would mean replacing that low rate with a significantly higher one . HELOCs can help you access cash without having to touch the low rate on your original mortgage.

Get help with your HELOC

To learn more about HELOCs and tax deductions, speak to your tax preparer or a certified public accountant. And if you’re not sure a HELOC is the right move or you want to explore other options, like home equity loans , refinancing, or even home equity sharing, talk to a mortgage professional or financial advisor . They can provide guidance that’s personalized to your goals and budget.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected] .

Barr pointed to the bank’s “concentrated business model,” in which its customers were overwhelmingly venture capital and high-tech firms in Silicon Valley. He also contends that the bank failed to manage the risk of its bond holdings, which lost value as the Fed raised interest rates.

Silicon Valley was seized by the Federal Deposit Insurance Corp. on March 10 in the second-largest bank failure in U.S. history. Late Sunday, the FDIC said that First Citizens Bank, based in Raleigh, North Carolina, had agreed to buy about one third of Silicon Valley’s assets — about $72 billion — at a discount of about $16.5 billion. The FDIC said its deposit insurance fund would take a $20 billion hit from its rescue of SVB, a record amount, in part because it agreed to backstop all deposits at the bank, including those above a $250,000 cap.

The Senate Banking Committee will hold the first formal congressional hearing on the failures of Silicon Valley Bank and New York-based Signature Bank and the shortcomings of supervision and regulation, by the Fed and other agencies, that preceded them. The committee will also likely question Barr and other officials about the government’s response, including its emergency decision to insure all the deposits at both banks, even as the vast majority exceeded the $250,000 limit.

Martin Gruenberg, chairman of the FDIC, and Nellie Liang, the Treasury undersecretary for domestic finance, will also testify at the Senate hearing. On Wednesday, all three will testify to a House committee.

Gruenberg said in his prepared testimony that the FDIC, which insures bank deposits, will investigate and potentially impose financial penalties on executives and board members of the two failed banks. The FDIC can also seek to bar them from working in the financial industry again.

Members of Congress will surely use the hearings to stake out their positions on issues raised by the bank failures. These issues include whether the $250,000 limit on federal deposit insurance should be raised, a change that would require Congress’ approval.

Also sure to be debated will be whether the failures can be blamed, to some extent, on the 2018 softening of the stricter bank regulations that were enacted by the 2010 Dodd-Frank law.

The Fed will evaluate whether “higher levels of capital and liquidity would have forestalled the bank’s failure or provided further resilience to the bank,” Barr said.

The 2018 law exempted banks with assets between $100 billion to $250 billion — Silicon Valley’s size — from requirements that it maintain sufficient cash, or liquidity, to cover 30 days of withdrawals. It also meant that banks of that size were subject less often to so-called “stress tests,” which sought to evaluate how they would fare in a sharp recession or a financial meltdown.

Simon Johnson, an economist at the Massachusetts Institute of Technology who co-wrote a book about the 2008-2009 financial crisis, said he believed the 2018 regulatory rollback “contributed to a big relaxation of supervision and fed into this lackadaisical attitude around Silicon Valley Bank.’’

The two bank failures, Johnson said, suggest that banks with $100 billion to $250 billion in assets can pose a risk to the entire financial system. The reduction of rules for banks of that size was based on the idea that they didn’t pose a systemic risk.

But Steven Kelly, senior research associate at the Yale program on financial stability, said he believed that Silicon Valley Bank’s business model was so flawed that requiring it to hold more liquidity wouldn’t have helped it withstand the lightning-fast bank run that toppled it. On Thursday, March 9, depositors — many of them operating swiftly, using smart phones — withdrew $42 billion, or 20% of its assets, in a single day.

“You’re never going to write liquidity regulations that are strict enough to prevent that, when there’s a run on a fundamentally unviable bank,” Kelly said.

In his prepared testimony, Barr also pledged that the Federal Reserve and other agencies would take whatever steps they deem necessary to protect depositors and the banking system. Regulators “are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound,” he said.

The Fed has come under harsh criticism by groups advocating tighter financial regulation for failing to adequately supervise Silicon Valley Bank and prevent its collapse, and Barr will likely face tough questioning by members of both parties.

Barr said he would ensure that the Fed “fully accounts for any supervisory or regulatory failings” in a previously announced review of the bank’s collapse.

He said officials at the Federal Reserve Bank of San Francisco, which directly supervised Silicon Valley Bank, had sent multiple warnings to the bank’s management about the risks it was taking, including its substantial holdings of Treasurys and other bonds that were steadily losing value as interest rates rose.

As recently as mid-February 2023, Barr says in his prepared testimony, Fed staffers told the central bank’s board of governors that rising rates were threatening the finances of some banks and highlighted, in particular, the risk-taking at Silicon Valley Bank.

“But, as it turned out,” Barr says, “the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9.”

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AP Economics Writer Paul Wiseman contributed to this report.