Are Home Equity Loans Tax Deductible? Use, Limits, and Itemizing

Interest on a home equity loan or HELOC is tax deductible, but only under narrow conditions: you have to spend the borrowed money to buy, build, or substantially improve the home that secures the loan, your combined mortgage debt has to stay within $750,000 ($375,000 if married filing separately), and you have to itemize on Schedule A rather than take the standard deduction. The One Big Beautiful Bill Act, signed in July 2025, made those rules permanent.¹

What You Spent the Money On Decides Everything

The IRS treats home equity loan interest as deductible only when the proceeds go toward buying, building, or substantially improving a qualified home.² Use HELOC funds to consolidate credit card debt, cover tuition, or take a vacation, and the interest on that portion is personal interest and not deductible.³

This applies regardless of when the debt was taken out. A home equity loan originating years before 2018 still loses its interest deduction if the money went to personal expenses.¹

One trap catches homeowners with more than one property: the improvement has to be to the same home that secures the loan. If you take a HELOC against your primary residence and spend the cash renovating a vacation cabin, that interest is not deductible as qualified residence interest, because the debt is secured by the primary home rather than the property being improved.¹

Split-Use Loans

When part of a loan pays for qualifying improvements and part covers personal spending, you deduct only the interest allocable to the improvement portion. Draw $100,000 from a HELOC, spend $60,000 on a kitchen remodel and $40,000 paying off credit cards, and 60% of the annual interest is potentially deductible. Keep separate bank statements, contractor invoices, and receipts showing where each draw went. Without documentation, the whole deduction is at risk during an audit.

Improvements vs. Repairs

“Substantially improve” is the IRS standard. A capital improvement adds value to the home, extends its useful life, or adapts it for a new use. Fixing something that broke, patching drywall or replacing a washer in a leaky faucet, restores the home to its previous condition and does not count.

The IRS lists concrete examples of qualifying improvements:⁴

Additions: bedrooms, bathrooms, decks, garages, porches
Major systems: new roof, central air, furnace, heating system, ductwork
Interior work: kitchen modernization, wall-to-wall carpeting, flooring, built-in appliances, insulation
Plumbing: septic system, water heater, water softener or filtration system
Exterior and grounds: landscaping, driveway, fencing, retaining walls, swimming pool, sprinkler system
Security and technology: storm windows and doors, security system, wiring upgrades

Painting a room, snaking a drain, or patching a roof leak are repairs, and interest on money spent on those jobs is not deductible. Replacing a single broken window is a repair. Replacing every window with energy-efficient models is an improvement. When in doubt, ask whether the project would raise the home’s appraised value or only maintain it.

The $750,000 Debt Cap

Total mortgage debt generating deductible interest is capped at $750,000 for joint filers and $375,000 for married taxpayers filing separately. That cap covers all mortgage debt combined: your original purchase loan plus any home equity loan or HELOC. If your existing mortgage balance is $600,000 and you take a $200,000 HELOC, only $150,000 of the HELOC falls within the cap, and only the interest on that $150,000 portion is deductible.¹

Mortgage debt taken out before December 16, 2017, qualifies for a higher limit of $1 million ($500,000 if married filing separately). Refinance one of these older loans and you keep the higher limit as long as the new balance does not exceed the old one. Cash pulled out during a refinance pushes the excess above that old balance into the $750,000 framework.¹

The $750,000 cap was widely expected to expire at the end of 2025. It did not. The One Big Beautiful Bill Act made the lower cap permanent and also permanently eliminated the deduction for home equity interest used on personal expenses. Neither rule has a sunset date.

You Have to Itemize

The deduction only helps if you itemize on Schedule A instead of taking the standard deduction. For 2026, the standard deduction is $16,100 for single filers and those married filing separately, $32,200 for married filing jointly, and $24,150 for head of household.⁵

If your total itemized deductions, including mortgage interest, state and local taxes (capped at $10,000), and charitable contributions, do not exceed your standard deduction, the equity loan interest deduction saves you nothing. Homeowners with smaller balances or lower rates often discover this only after running the numbers. Run them both ways before assuming you come out ahead.

Which Properties Qualify

The loan must be secured by a “qualified residence,” meaning your primary home or one second home you designate for the tax year.⁶ A second home can be a house, condo, co-op, mobile home, or even a boat or RV, as long as it has sleeping space, a toilet, and cooking facilities.

The debt must be formally recorded and secured by the property, giving the lender a legal claim if you default. An unsecured personal loan does not qualify even if every dollar goes into a kitchen remodel. The mortgage or deed of trust is what makes the interest potentially deductible.

One wrinkle for boats and RVs: for regular tax purposes they can be a second home, but under Alternative Minimum Tax rules a qualified dwelling does not include boats or RVs used on a transient basis.⁷ If you owe AMT, you may have to add that interest back.

Points and Fees

Points on a home equity loan or HELOC, sometimes called origination fees or discount points, are prepaid interest. Unlike points on a purchase mortgage for your primary home, which can often be deducted in full the year paid, points on a home equity loan or HELOC are generally deducted over the life of the loan.⁸ Pay $3,000 in points on a 15-year loan and you deduct $200 per year.

Not every upfront cost counts as points. Appraisal fees, notary fees, mortgage insurance premiums, and title costs are not deductible as interest, even though they show up on your closing statement.⁸

How to Claim It

Your lender sends Form 1098 reporting at least $600 in interest paid during the year.⁹ Box 1 shows total interest but does not separate qualifying-use interest from personal-use interest. If you used your HELOC for a mix of purposes, you calculate the deductible portion yourself.

Report the deductible interest on Schedule A (Form 1040).¹⁰ Keep these records:

The closing disclosure or settlement statement showing the amount borrowed and the securing property
Contractor invoices and receipts proving the money went toward qualifying improvements
Bank or HELOC draw records showing when funds were disbursed and to whom
Form 1098 from your lender

On audit, the IRS can ask you to trace every dollar of claimed interest to a qualifying improvement. Homeowners who commingle HELOC funds with personal money in a single account make that nearly impossible. The cleanest approach is to deposit loan proceeds into a dedicated account and pay contractors directly from it.

1
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
2
Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses 2
3
Office of the Law Revision Counsel. 26 USC 163 – Interest
4
Internal Revenue Service. Publication 527, Residential Rental Property
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Cornell Law Institute. Definition: Qualified Residence From 26 USC 163(h)(4)
7
Internal Revenue Service. Instructions for Form 6251
8
Internal Revenue Service. Topic No. 504, Home Mortgage Points
9
Internal Revenue Service. About Form 1098, Mortgage Interest Statement
10
Internal Revenue Service. 2025 Instructions for Schedule A (Form 1040)