Are Home Equity Loans And HELOCS Tax-Deductible?

Are home equity loans and HELOCs tax-deductible?

One of the big advantages of home equity loans over other types of financing is that they offer some tax benefits. But only under certain circumstances.

Strictly speaking, only the interest on a home equity loan or line of credit is tax-deductible, not the loan principal itself. Whether or not you can deduct the interest paid on your home equity loan or home equity line of credit (HELOC) depends on when you took out your loan, how much you borrowed, and what you used the funds for. Also significant: whether you are opting to itemize or to take the standard deduction on your tax return.

What are the rules for home equity tax deductions?

Until 2017, you could take out a home equity loan, use it for almost anything, and fully deduct the annual interest you paid on your tax return. With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), all that changed – and the tax bill signed into law in July 2025 has extended those changes.  

The now-permanent rules limit the use of the borrowed funds. For the interest to be tax-deductible, the money must go towards buying, building or substantially improving the property securing the loan. “This includes big upgrades like additions, new roofs, or major remodels— things that add value to the property or extend its useful life,” says Ryan Cicchelli, founder of The Safe Investing Expert, a Cadillac, Mich.-based financial planning firm. 

That means you won’t be able to deduct the interest on a home equity loan that’s used for anything not home-related.  “If that same loan is used to consolidate credit card debt, take a vacation, or pay college tuition, even if it’s secured by the home—the interest is not deductible under current law,” he notes. 

The TCJA also limited the amount of interest you could deduct. Joint filers who took out their home equity loan after Dec. 15, 2017, can deduct interest on up to $750,000 worth of qualified loans, while separate filers and singles can deduct the interest on up to $375,000. If you took out your home equity loan prior to Dec. 15, 2017, your limits are higher: at $1 million for joint filers and $500,000 for separate filers and singles.

Bear in mind: These limits also include any mortgage loans currently outstanding. For example, if you still have a mortgage balance of $500,000, only $250,000 of home equity loan debt will be eligible for a tax deduction.

Home equity loan deductions

Examples of home equity loan deduction rules

Let’s say in 2022 you took out a home equity loan of $200,000. Half of that loan went toward paying off outstanding credit card balances, while the other half went toward the construction of a new home office. In this scenario, any interest you paid on the $100,000 used for your home renovation would be tax-deductible, but the interest you paid on the $100,000 used for the credit card debt would not be.

Now let’s say in 2025 you already have an outstanding mortgage balance of $700,000 on your primary residence, and you take out a HELOC in the amount of $100,000 to renovate your kitchen. Because the total mortgage-related debt (original mortgage + HELOC) now adds up to $800,000, and the mortgage interest deduction cap is $750,000, only a portion of your HELOC interest is deductible. In this case, only $50,000 of the HELOC falls within the deductible debt limit— meaning that only half of the interest you pay on the HELOC would be eligible for a tax deduction.

There’s another condition to taking home equity loan interest. Taxpayers must itemize their deductions (as opposed to taking the standard deduction) on their tax returns.

How to claim a home equity loan interest deduction

There’s another condition to taking home equity loan interest. Taxpayers must itemize their deductions (as opposed to taking the standard deduction) on their tax returns.

1. Know where you stand with both mortgages

The loan you originally took out to buy the home is your first mortgage, and the home equity loan is your second mortgage. Both mortgages must fit IRS requirements.

Combined, the debt must:

• Not exceed $750,000 or $1 million, depending on when the loans were taken out
• Be secured by a “qualified residence,” which can be your main home or second home
• Not exceed the value of the residence(s)
• Be used to acquire or substantially improve the residence(s)

You can find the dollar amounts of your mortgage and home equity loan on your most recent billing statements or by calling your loan servicer.

Next, confirm whether the home equity loan was used to buy, build, or improve your home. Here’s a rule of thumb: A “substantial” improvement is one that adds value to the home, prolongs its useful life or adapts a home to new use.

While the IRS doesn’t offer a full catalog of expenses that fit this description, here are a few examples:

• Building an addition to the home
• Installing a new roof
• Replacing an HVAC system
• Extensively remodeling a kitchen
• Resurfacing a driveway

2. Gather your documents

To deduct home equity loan interest on your tax return, gather the following documents:

• Mortgage interest statement (Form 1098): This form is provided by your home equity loan lender and shows the total amount of interest paid during the previous tax year.
• Statement for additional interest paid, if applicable: If you paid more home equity loan interest than the amount displayed on your Form 1098, you must include a statement with the return, indicating the additional amount of interest paid and an explanation for  the discrepancy.
• Proof of how home equity funds were used: Keep receipts and invoices for any expenses that significantly improve the value, longevity or adaptability of your home. These documents include costs for materials, labor and permits needed for the renovation or repair.

3. Itemize your deductions

To take advantage of this tax break, you’ll need to itemize your deductions at tax time. That’s only worth doing if all of your deductions add up to more than the amount of the standard deduction for the appropriate tax year. You can either take the standard deduction or itemize deductions — but not both.

Greatly enhanced by the Tax Cuts and Jobs Act, the standard deduction amounts to:

Total your itemized expenses, including your home equity loan interest, and compare them to your standard deduction. Then, you can decide whether itemizing is to your advantage.

For instance, say you and your spouse are filing your 2026 joint tax return (for tax year 2025). You paid $2,600 in interest on a home equity loan and $9,100 in interest on your mortgage in 2025. These are the only deductions you can itemize for a combined value of $11,700. Because $11,700 is far lower than the standard deduction of $31,500 for a couple, it doesn’t make sense to itemize just to deduct the interest you paid.

If you do end up taking the home equity loan interest deduction, you would claim it on IRS tax form Schedule A, Itemized Deductions.

FAQ

• What are some other tax breaks available to homeowners?
  

  Beyond home equity interest deductions, you may qualify for mortgage interest deductions, a deduction for mortgage insurance premiums, property tax deductions (subject to SALT caps, greatly enhanced this year), energy-efficiency credits, or home office deductions if you’re self-employed.

• What are other advantages of home equity loans and HELOCs?
  

  Home equity loans and HELOCs typically offer lower interest rates than credit cards or personal loans, flexible repayment terms. Compared to personal loans, their repayment periods are much longer as well.

• Can I take out a home equity loan to pay my taxes?
  

  Yes, though the interest won’t be tax-deductible. Still, if your tax bill is sizable ($25,000 and up), it might be the most affordable option – even better than an IRS installment repayment agreement, whose penalties and interest charges can be considerable at this level.