Suppose I bought a home for $200k, and 20 years from now its value is $800k and I get a home equity line of credit for x dollars (e.g. to pay for my child's college education).

A quick Google search told me that the equity line of credit doesn't get taxed. How can this be, if I have benefitted from the capital gain?


The reason I'm asking this is because I was wondering why would someone invest in other instruments (e.g. stocks) to pay for childrens' college education when the capital gains on those are taxed, unlike a home equity loan.

  • 3
    A capital gain is a profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price. There is no gain, you borrow against the equity which you pay back (with interest). Even if after 20 years your house is only worth $150K and paid off, you can borrow against that. Commented Sep 16, 2015 at 19:38
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    The interest you pay on the loan is taxable, for the lender -- for them, it's income. The returned principal isn't.
    – keshlam
    Commented Sep 16, 2015 at 22:00

4 Answers 4


You'll be taxed when you sell the house, but not before that (or if you do some other transaction that realizes the gain, talk to your real estate attorney or accountant for more details).

A Home Equity line-of-credit is simply a secured loan: it's a loan, conditioned on if you fail to pay it back, they have a lien on your house (and may be able to force you to sell it to pay the loan back).

  • Hmmmm, I think I get it. Since you have to pay off the loan using taxable income, you incur the tax at that end of the proverbial pipeline. Commented Sep 16, 2015 at 19:42
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    @Sridhar-Sarnobat, no you don't get it at all, and it is wrong and not what Joe has written in his answer. You don't pay CGT because you have not sold and received a capital gain from the sale. The interest on the loan may even be tax deductible depending on what country you are in and the purpose of the loan.
    – user9822
    Commented Sep 16, 2015 at 21:03

Loans are not taxable events. The equity you took out is not income. It's a loan, and you pay it back with interest.

You pay taxes on the capital gain of the home when you sell it. The tax does not take into account any mortgages, HELOCs, or other loans secured by the house. Instead the tax is calculated based on the price you sold it for, minus the price you bought it for, which is known as the capital gain. You can exclude $250k of that gain for a single person, $500k for a married couple. (There are a few other wrikles as well.) That would be true regardless of the loan balance at the time.


(credits to Joe's answer above which alluded to what I was not considering)

You aren't "bypassing" the tax liability if you invest in a home instead of, say, stocks.

It's true stocks would be subject to tax during the year you cash in on them while the proceeds of a home equity loan would not affect your tax liability. HOWEVER, by taking on a new loan, you are liable for repayments. Those repayments would be made using your income from other sources, which IS taxable. So you can't avoid tax liability when financing your child's college education by using an equity line.


Why would someone invest in other instruments (e.g. stocks) to pay for childrens' college education when the capital gains on those are taxed, unlike a home equity loan?

Many tax advantageous vehicles exist for the purpose of saving for college education such as 529 plans, Roth IRAs, Series EE and I bonds. Tax and penalty free distributions from a portfolio of stocks is possible if the distributions are for qualified education expenses and the account is in the form of a Roth IRA.

A house is collateral for a home equity line of credit. A combination of unfortunate events could cause someone to default on the loan and loose their residence. Also, the tax advantages of 529 plans, and Roth IRAs are not applicable to purchase a motor boat. With respect, some people like to leave the home equity loan untapped for other uses.

More Details:

529 plans are not taxed by on the Federal level when the withdraws are used for college. In many states, contributions to state sponsored 529 plans are deductible on the state level. These are not self directed so you can't trade stocks/bonds in a 529 plan, however, certain plans allow you to lock in the rate you pay for credit at today's prices.

If you want a self directed (ability to trade stocks/bonds) vehicle with tax free disbursements for qualified education, consider a Roth IRA. There are yearly contribution limits, and penalty if the proceeds are not used for qualified educational expenses.

Also I believe interest revenue from Series EE and I bonds is tax free if the bond is used for education.

There are special conditions and situations to 529 plans, Roth IRAs, Series EE and I bonds, the purpose of this answer was to expand upon the tax advantageous vehicles for higher education.

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