How to Deduct Home Improvement Loan Interest on Your Taxes

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

people looking at floor plans for home remodel and home improvements
Logo

We’ve got your back! Student Loan Hero is a completely free website 100% focused on helping student loan borrowers get the answers they need. Read more

How do we make money? It’s actually pretty simple. If you choose to check out and become a customer of any of the loan providers featured on our site, we get compensated for sending you their way. This helps pay for our amazing staff of writers (many of which are paying back student loans of their own!).

Bottom line: We’re here for you. So please learn all you can, email us with any questions, and feel free to visit or not visit any of the loan providers on our site. Read less

Upgrading your home can get pricey pretty fast. The average cost to remodel a bathroom was over $9,700 in June 2018, according to HomeAdvisor, and the average for redoing a kitchen was about $22,300.

Few people have that kind of money lying around. As a result, getting a home improvement loan seems like the most attractive option.

The good news is that, depending on your situation, you might get a tax deduction on the interest paid toward your home improvement loan.

Is the interest on home improvement loans tax-deductible?

“The short answer is yes, you can deduct loan interest from a home improvement loan on your taxes,” said Joshua Escalante Troesh, a financial planner with Purposeful Strategic Partners. “However, there are limitations on how you use the money, thanks to the tax law passed in 2017.”

To claim a tax deduction, you need to meet two conditions:

  1. Your home improvement loan must be secured by your primary residence.
  2. You must use the proceeds to “substantially improve” the property that’s securing the loan.

But what does this jargon mean? Here’s what you need to know before deciding the answer to the question: Is the interest on home improvement loans tax-deductible?

Determining your home’s eligibility

The first part of the IRS test is fairly straightforward, according to William Perez, an IRS enrolled agent and a senior tax accountant with tax prep firm Visor.

“You must own the home, and you must live in it as your residence,” Perez said. “Additionally, you must be the borrower on the home improvement loan, and it must be secured by the property you’re improving.”

If the loan doesn’t meet the first criterion, there’s no reason to proceed. However, if you’re using a home equity loan or a home equity line of credit (HELOC), you can move on to the next part of the eligibility formula.

In the past, Perez pointed out, homeowners used home equity loans and HELOCs to consolidate debt and pay for vacations — and claimed a tax deduction. Between 2018 and 2026, however, that’s no longer allowed due to the new tax law.

Now, you must show you used the money to improve your home before you can take the tax deduction.

“The IRS doesn’t care what the bank calls the loan,” Troesh said. “They care about how the money was actually used.”

Which capital improvements qualify

If you want your home improvement to count for tax purposes, the project must add value to the home, or at least adapt it for a new use or extend its long-term usefulness.

Some of the common home improvement projects that meet the IRS requirement to qualify for substantial capital improvement include:

  • Adding a room
  • Replacing the entire roof
  • Installing central air conditioning or a heating system
  • Paving the driveway
  • Completely rewiring the home
  • Remodeling a room, such as a kitchen or a bathroom
  • Adding new siding
  • Insulating the home
  • Adding a deck, porch, or patio
  • Building a swimming pool

“Repairs and routine maintenance don’t count,” Perez said. “So don’t try to deduct the interest on loan funds used for those purposes.”

Once you determine that your project qualifies, you can take steps to claim your deduction.

How much you can deduct from your taxes

You can’t deduct the amount you spend on your home improvements from your taxes, but you can claim the amount of loan interest paid.

Starting in 2018, you can deduct the interest on home improvement loans of up to $750,000 if you file jointly (and $375,000 for those filing separately). This represents a drop in the eligible loan amount, which used to be $1 million for joint filers (and $500,000 for those filing separately).

So, if you borrow $30,000 to upgrade your kitchen and remodel your bathroom, you could deduct the total amount of interest you pay on the home improvement loan throughout the year.

However, there’s another caveat. If the combined amount of your first mortgage and your HELOC or home equity loan exceeds the value of your home, you’ll receive a smaller deduction. For example, if you owe $150,000 on a home worth $170,000, and your bank lets you borrow $30,000, your tax deduction will be prorated because the total debt secured by your home is $180,000, or $10,000 more than its value.

“Before taking out a loan for home improvements, consult a qualified tax adviser to make sure your property is eligible,” Troesh said.

Perez also pointed out that in addition to receiving a tax deduction for home improvements, it’s possible to get a tax credit for solar electric and water heating systems.

Keep good records of your home improvement transactions

“Homeowners need records and receipts to prove they’re eligible for the tax deduction on home improvement loans,” Perez said.

Here’s what he advises his clients to keep:

  • The loan contract
  • Escrow closing statements
  • Receipts for work done on the home
  • Form 1098 (the mortgage interest statement issued by the lender)

If you need to send these documents with your tax return or if they’re requested by the IRS in an audit, Perez recommended sending copies. You should keep the originals for your records. Consider making digital copies and storing them in an encrypted folder in a cloud service.

Is interest on personal loans for home improvement tax-deductible?

It’s possible to pay for home improvements by using unsecured personal loans. However, even though you use those loans for making capital improvements at your house, you won’t be able to deduct the interest on your taxes.

If you borrow money to put in solar systems for electric and hot water, you can claim the appropriate tax credit, but you can’t deduct the interest you pay.

For homeowners with certain credit and income situations, it can sometimes be cheaper to get a personal loan for home improvements, rather than use a home equity loan. The interest savings might exceed the value of a tax deduction.

Troesh recommended discussing your situation with a financial planner and a tax professional.

“There are many circumstances where proper financial planning will discover a method to fund the improvement with lower-cost funding, even when the tax deduction factored in,” he said.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.