Is Home Equity Loan Interest Still Tax Deductible?

Interest on a home equity loan is tax deductible in 2026, but only when you used the borrowed money to buy, build, or substantially improve the home that secures the loan. Congress made that restriction permanent in July 2025 through the One Big Beautiful Bill Act, extending a rule that had been set to expire at the end of 2025.¹ If you spent the proceeds on credit card balances, tuition, a car, or a vacation, the interest is not deductible at all.

Two other conditions have to line up before the deduction actually shows up on your return. Your total mortgage debt has to sit within the IRS cap, and you have to itemize on Schedule A instead of taking the standard deduction. Miss either one and the interest you paid produces no tax benefit, no matter how you used the money.

What the “Buy, Build, or Substantially Improve” Rule Covers

The IRS ties deductibility to one question: did the loan proceeds go into a qualified residence? That means your main home or a second home you use personally. A second home you rent out has to be used by you for more than 14 days a year or more than 10 percent of the days it was rented at fair market value, whichever is longer.²

The label on the loan does not control the outcome. A product called a “home equity loan” or “HELOC” can generate deductible interest, but only when the dollars land in the home itself. Pay off personal debts with it, and none of the interest qualifies.

What Counts as a Substantial Improvement

A substantial improvement adds value to the home, extends its useful life, or adapts it to a new use. Replacing a roof, adding a bedroom, remodeling a kitchen with new plumbing and cabinetry, installing central air conditioning, paving a dirt driveway, or finishing a basement all qualify.²

Routine maintenance does not. Fixing a broken window, repainting a room, or patching drywall are repairs. There is one useful exception: if a repair is part of a larger project that does qualify, you can fold the repair cost into the improvement. Repainting the kitchen walls during a full kitchen remodel counts. Repainting on its own does not.

Building materials, architect fees, design plans, and building permits all count toward the improvement cost. Keep the receipts. If the IRS questions the deduction, the burden of showing the work went beyond upkeep is on you.

The Debt Cap That Limits the Deduction

Even when the proceeds went into the house, there is a ceiling on how much mortgage debt can produce a deduction. The cap applies to your combined acquisition debt across all qualifying homes, including your primary mortgage and the home equity loan.

Debt taken out after December 15, 2017: interest is deductible on up to $750,000 of combined mortgage debt, or $375,000 if you’re married filing separately. The One Big Beautiful Bill Act made this cap permanent.²
Debt taken out before December 16, 2017: grandfathered at the older $1 million cap ($500,000 if married filing separately), as long as you haven’t refinanced above the original balance.³

If your balances exceed the applicable limit, you deduct a proportional share of the interest. Divide the limit by your total mortgage balance, then multiply by the total interest you paid. That fraction is what you can claim.

HELOCs and Mixed-Use Draws

A HELOC works differently from a lump-sum home equity loan in how you access the money, but the IRS treats the two identically. Interest on drawn funds is deductible only when those funds went to buying, building, or substantially improving the home securing the line, and the same debt caps apply.⁴

The tracking problem is that you can draw at different times for different reasons. Pull $40,000 for a new roof in March and $15,000 for a family vacation in August, and only the interest tied to the $40,000 draw is deductible. Keep records of each draw and what you spent it on.

The same principle applies to any mixed-use home equity loan. You prorate the interest based on how the money was actually spent. IRS Publication 936 includes a worksheet (Table 1) that walks through the calculation using average monthly balances allocated to each category of debt.² One quirk works in your favor over time: principal payments apply to the non-qualified portion of the balance first, so the deductible share of your interest grows year by year. Still, the cleanest approach is not to mix uses in the first place.

Whether Itemizing Is Worth It

The deduction only exists if you itemize on Schedule A. Take the standard deduction and the home equity loan interest produces nothing.⁵

For 2026, the standard deduction is $16,100 for single filers, $32,200 for married filing jointly, and $24,150 for head of household.⁶ Those numbers are high enough that many homeowners come out ahead taking the standard deduction. Before assuming your home equity loan interest will save you tax, add up everything that would go on Schedule A: interest on your primary mortgage, interest on the home equity loan, state and local taxes (now capped at $40,000 for joint filers under the updated SALT limit), and charitable contributions. If the total sits below your standard deduction, itemizing costs you money.

How to Claim the Deduction

Your lender sends IRS Form 1098 by January 31, showing total mortgage interest paid the prior year in Box 1. That figure covers interest on all mortgage debt secured by the property, including the home equity loan. The IRS gets a copy too and will match it against your return.

Form 1098 alone will not carry you through an audit on a home equity loan. You also need proof that the proceeds went to qualifying work. Useful records include:

Contractor invoices and signed contracts showing scope and cost
Receipts for building materials if you did the work yourself
Architect or design fees with a description of the project
Building permits, which tie the work to the property address
Bank or lender records showing disbursement dates and amounts

If only part of the loan went to improvements, the documentation needs to make the split clear so your proration holds up. The IRS does not require a specific form, but a simple spreadsheet tracking each disbursement and its purpose is worth the ten minutes it takes to build.

On the return itself, deductible mortgage interest goes on Schedule A, with the amount matched to Form 1098 and any proration you’ve calculated. Points not reported on Form 1098 go on line 8c. If your combined mortgage debt exceeds the $750,000 cap (or $1 million if grandfathered), work through the Publication 936 worksheet to find the deductible portion before entering it. Tax software does this automatically once you enter the balances and interest.²

Refinancing and Points: Two Situations Worth Knowing

Refinancing a home equity loan does not automatically preserve deductibility. The replacement loan is treated as acquisition indebtedness only up to the balance of the old loan at the time of refinancing.¹ Refinance a $60,000 loan into a $90,000 loan and take $30,000 in cash, and the interest on that extra $30,000 is deductible only if you spend it on qualifying improvements. The rolled-over portion keeps its original character, so if the first loan paid for a kitchen remodel, that piece stays deductible without re-proving the expense.

Points paid on a home equity loan are usually not deductible in full the year you pay them. Unlike points on a loan used to purchase your main home, they get spread over the life of the loan. On a 15-year loan with 180 monthly payments, you deduct a fraction each year based on the payments you made that year.³ If you pay the loan off early or refinance with a different lender, any unamortized points become deductible in the year the loan ends. Refinancing with the same lender does not trigger that acceleration.

1
Office of the Law Revision Counsel. 26 USC 163 – Interest
2
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
3
Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)
4
Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)
5
Internal Revenue Service. About Schedule A (Form 1040), Itemized Deductions
6
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026