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:
- Your home improvement loan must be secured by your primary residence.
- 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.
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|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
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8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
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|6.26% – 14.87%1||$5,000 - $100,000|
|6.99% – 35.97%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
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|15.49% – 34.49%5||$2,000 - $25,000|
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|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|