A HELOC or “home equity line of credit” is popular among Maryland homeowners. In a seller’s market with rising home prices, homeowners seek to take advantage of credit opportunities without taking out additional personal loans or mortgages. A HELOC can provide tax advantages to homeowners while providing the funds they need to complete renovations.
This article examines common questions about HELOC tax benefits to help Maryland residents understand the advantages. Rather than frantically searching “home equity loan rates Maryland” online, homeowners should consider a professional financial advisor to answer questions about how a HELOC can help.
What is a HELOC?
A home equity line of credit helps homeowners reach their financial goals while providing more tax advantages than other lines of credit. It allows homeowners to borrow money against the equity of their homes. Since this loan is a secured line of credit with clear collateral, the interest rates are often lower than on personal loans or credit cards.
A HELOC is also a revolving line of credit, meaning homeowners can withdraw money as needed. HELOCs are particularly popular among homeowners planning home renovations and other fixed-price projects. Instead of borrowing a lump sum through a personal loan and paying interest on the excess, homeowners can choose to borrow what they need, up to the maximum percentage of their equity allowed by their lender.
Lenders consider multiple factors when determining this percentage, including the borrower’s income, employment history, credit score, debt history, and current loan status. The exact conditions of your HELOC will differ depending on your history and your lender’s policies.
What are the Tax Benefits of Opening a HELOC?
The Tax Cuts and Jobs Act provides tax benefits to homeowners who borrow against their equity. According to the Act, the interest paid on a HELOC loan can be deducted from the homeowner’s income taxes as home acquisition debt, provided the funds were used to “substantially improve the residence.”
Notably, this restriction started in the 2018 tax year and extends through 2025. Before 2018, interest on HELOC loans could be deducted up to a certain amount regardless of usage. This is how many homeowners paid off personal loans or credit cards while taking advantage of the lower interest rates and tax deductions. Today, this is no longer possible, but benefits are still available.
How to Take Advantage of HELOC Benefits
Under the current legislation, homeowners must track how they spend their HELOC funds to take advantage of the tax benefits. The important question is: what qualifies as “substantial improvements” to the residence?
To answer this question, review Page 10 of Publication 936 through the IRS (“Home Mortgage Interest Deduction”). According to this, a significant home improvement is one that:
- Increases the value of your home,
- Extends your home's useful life, or
- Adapts your home to new uses
The ambiguity of this wording means that Maryland homeowners should make sure their home improvements are well-documented in case their deduction is questioned. Before filing for the deduction, consider how the insurance auditor will perceive the renovations.
For example, improvements that only impact the house aesthetically will likely not qualify for the benefit, including painting. Likewise, purchasing furniture or appliances does not impact the usefulness of the house itself or add to its value. Examples of HELOC usage that do qualify homeowners for the deduction include:
- Room remodels, including kitchen and bathroom
- Driveway resurfacing
- HVAC replacement
- Roof replacement
- Substantial landscaping
Notably, most home repairs will not qualify for the deduction, although they may add value to the home. The loophole is that in the eyes of the IRS, restoring the house to its real market value is not the same as adding to or changing the property's value.
Many homeowners mistakenly deduct interest paid on home repairs, appliances, and other non-substantial costs from their taxes. To avoid this costly mistake, an experienced financial advisor can tell you whether your repairs qualify for HELOC tax benefits and how much you can deduct.
Contact Woodsboro Bank for Professional Help With HELOC Loans and Tax Benefits
At Woodsboro Bank, we prioritize helping our clients get the highest possible tax benefits on their loans. HELOC loans can be advantageous for Maryland homeowners, provided they spend the funds on projects the IRS recognizes as substantial home improvements.
Contact our team today to learn how HELOC benefits could impact your financial situation. During your free consultation, we will examine your finances and help you begin using HELOC funds to improve your home while deducting more from next year’s taxes.