Can You Deduct Interest on a Home Equity Line of Credit?

You can deduct the interest on a home equity line of credit only when you use the borrowed money to buy, build, or substantially improve the home that secures the loan, and only up to a combined mortgage debt limit of $750,000 ($375,000 if married filing separately). Spend the funds on a car, a vacation, tuition, or credit card payoff, and the interest on that portion is not deductible, even though your house is the collateral.¹

This rule was originally set to expire after 2025. The One, Big, Beautiful Bill Act, signed on July 4, 2025, made it permanent, so the same standard applies for 2026 and beyond.²

What Counts as a Qualifying Use

To generate deductible interest, HELOC proceeds must go toward acquiring, constructing, or substantially improving the home that secures the loan. A substantial improvement is one that adds value to the property, extends its useful life, or adapts it to a new use. The loan must also be secured by a qualified home, meaning your primary residence or a second home with sleeping, cooking, and bathroom facilities.³

Projects that typically qualify include:

Replacing a roof or siding
Adding a room, garage, or deck
Remodeling a kitchen or bathroom
Installing major systems such as central air conditioning, a furnace, or solar panels

Routine maintenance does not count. Repainting walls, patching drywall, or fixing a leaky faucet keeps your home in its current condition without adding value or extending its life, so any interest tied to those expenses is not deductible.³

What Doesn’t Qualify

If you spend HELOC funds on anything other than buying, building, or improving the home, the interest on that portion is treated as nondeductible personal interest. The IRS looks at where the money actually went, not what collateral backs the loan.¹

Common non-qualifying uses include:

Paying off credit card debt
Buying a vehicle
Funding a wedding, vacation, or college tuition
Covering medical bills or other personal expenses

Mixed draws are handled dollar for dollar. If you take $80,000 from your HELOC and put $50,000 into a kitchen remodel and $30,000 toward a vacation, only the interest tied to the $50,000 remodel is deductible. Under the IRS interest tracing rules, debt is allocated to the expenditure it funded, regardless of what secures the loan.⁴

The cleanest way to keep tracing simple is to move HELOC draws intended for home improvements into a separate checking account and pay contractors and suppliers from that account. Mixing improvement money and personal spending in a single account forces you to trace each draw individually, which is harder to reconstruct later and harder to defend in an audit.

The $750,000 Combined Debt Limit

The total mortgage debt that can generate deductible interest is capped at $750,000 for most taxpayers, or $375,000 if you are married filing separately. That ceiling covers everything secured by your primary and second homes combined: your first mortgage, your HELOC, and any other home equity loan. Balances above the cap produce interest that is only partly deductible, based on the ratio of the limit to your average balance.³

Grandfathered Debt From Before December 16, 2017

Mortgage debt you took on before December 16, 2017, to buy, build, or improve your home keeps the older, higher limit of $1 million ($500,000 if married filing separately). If you add a new HELOC on top of a grandfathered mortgage, the $750,000 ceiling for new debt is reduced by the balance of the older loan. Owe $600,000 on a pre-2017 mortgage, and a new HELOC can contribute only another $150,000 in deductible debt before hitting the combined cap.³

Refinancing a pre-2017 mortgage generally preserves the grandfathered treatment, but only up to the balance at the time of refinancing and only for the remaining term of the original loan. Anything borrowed above the old balance is treated as new debt and falls under the $750,000 rule.³

If You Used the HELOC for a Rental or Business

Borrowing against your home but spending the money on a rental property or a business changes where the deduction lives. The interest is not claimed as home mortgage interest on Schedule A. Under the interest tracing regulations, debt proceeds follow the expenditure, so HELOC interest spent on a rental is typically reported as a rental expense on Schedule E, and interest spent on a business goes on Schedule C.⁴

Because that interest is a business or investment deduction rather than personal mortgage interest, the $750,000 cap does not apply. Other limits can, though, including passive activity loss rules for rental properties. A tax professional can help sort out which schedule the interest belongs on and how much of it is currently deductible.

Is Itemizing Worth It?

You only get the HELOC interest deduction if you itemize on Schedule A. For tax year 2026, the standard deduction amounts are:⁵

Single: $16,100
Married filing jointly: $32,200
Married filing separately: $16,100
Head of household: $24,150

Itemizing only saves money when your combined itemized deductions — mortgage interest, state and local taxes (capped at $10,000), charitable contributions, and other qualifying items — exceed the standard deduction for your filing status. If your HELOC interest is $3,000 and you have little else to itemize, the standard deduction will almost certainly leave you ahead. Run both totals before you decide.

How to Claim the Deduction

Your lender will send you IRS Form 1098 (Mortgage Interest Statement) by January 31, showing the interest you paid the previous year in Box 1. Multiple loans or lenders can mean multiple 1098s.⁶

Report the deductible portion of your mortgage interest on the home mortgage interest line of Schedule A (Form 1040). If your Form 1098 includes interest tied to non-qualifying personal spending, reduce the reported amount so that only the qualifying portion is deducted.⁷

Upfront costs to open the line, such as appraisal fees, title insurance, and application fees, are generally not deductible. Only the interest on the outstanding balance qualifies.

Records to Keep

If the IRS questions your deduction, you will need to show both how much interest you paid and where the borrowed money went. Useful documentation includes:

Form 1098 from your lender for each year you claim the deduction
Contractor invoices and receipts for materials, tied to specific improvement projects
Bank or HELOC statements showing draw dates and amounts alongside payments to contractors or suppliers
Before-and-after photos of major projects, which help establish that the work qualifies as a substantial improvement

Organize records project by project so each draw connects to a specific improvement. The IRS generally expects tax records to be kept at least three years after filing, but improvement receipts affect your home’s cost basis and should be kept for as long as you own the property, plus three years after you file the return for the year you sell.⁸

1
Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses
2
Internal Revenue Service. One, Big, Beautiful Bill Provisions – Individuals and Workers
3
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
4
eCFR. 26 CFR 1.163-8T – Allocation of Interest Expense Among Expenditures
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. About Form 1098, Mortgage Interest Statement
7
Internal Revenue Service. Instructions for Schedule A (Form 1040) – Itemized Deductions
8
Internal Revenue Service. How Long Should I Keep Records