Is interest from a loan for home improvements tax deductible?

by Shane R. Fisher, CPA | Jun 27, 2018

My wife and I purchased a home in 2015. We replaced all the windows—a project which cost $22,000—and financed the cost through a credit union loan. Is the interest on that loan tax deductible? If not, what if we establish a home equity line of credit (HELOC) or home loan against our equity to pay off the credit union loan? Will the interest on the HELOC or home loan be tax deductible, given the funds are being used to pay off a loan that was originally used to invest in the home structure?

The $22,000 you used to replace all the windows would be treated similar to a mortgage on the property since the work was done to a residence. As long as the total amount of debt outstanding is not greater than $750,000 between the original property mortgage and the loan to do the windows project, the amount of interest paid is fully deductible as an itemized deduction. If the debt exceeds $750,000, then the interest would be prorated on the total amount of debt (i.e., if there was $1 million in debt and $100,000 in interest, only $75,000 in interest would be deductible).
If you wanted to refinance the current windows loan to a HELOC, you would still be able to deduct the interest as an itemized deduction. HELOC interest is not deductible if the loan is used to pay off something unrelated to work done to the residence. So, if you used a HELOC to pay off a vehicle or help pay off credit card debt, that interest is not deductible as an itemized deduction.
Again, as long as you can prove the loan was used to benefit the residence (repairs/additions to the residence/renovation), then it is deductible up to $750,000 in total debt; after that it is prorated based on the total debt outstanding.

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Answered by: Shane R. Fisher, CPA, is a manager with Boyer & Ritter LLC in Camp Hill, Pa. 

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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