Interest Paid on Home Equity Loan

[OCTrojan]

Hello: I obtained a home equity loan in 2021 to complete a major remodel of my primary residence; however, I have not been able to secure a contractor to start the project and haven't actually used any of the funds yet. Thus, is the interest on my equity loan still deductible? I'm not using the funds for any other purpose, as these funds are dedicated to the remodel of my home, so I figured the interest is tax deductible even though I haven't started the project yet, but I'm not entirely sure.

[Mike9241]

i would disagree since no part of the loan has actually been used to improve your home, what you're paying isn't really interest but a fee to have a line of credit. the interest that would be deductible can't exceed the amount of loan related to the actual costs of improvements which is zero.  the rules for a construction loan say that any interest paid is personal for any period before construction begins.

[OCTrojan]

Thank you @Mike9241 for the reply and I figured this was the case, so thanks for confirming my suspicions. But if I spend the entire original loan amount (given I haven't spent it yet) on the project in 2022 (assuming I start and finish the project in 2022), would I be able to deduct the interest going forward? Or would I only be able to deduct a portion of the loan interest? Thanks again for your help on this.

[Mike9241]

interest on a construction loan is qualified residential interest as long as it falls within these parameters

1) construction interest (after construction begins) is treated as qualified interest for up to 24 months provided that when ready for occupancy the house is used as a main or second home after that it's personal

2) the use of the loan proceeds must be directly traceable to home construction expenses