For the interest on a home equity loan or HELOC to be deductible, the money has to fund a “substantial” improvement to the home securing the loan, and the IRS defines substantial with a three-part test: the project must add value to the home, prolong its useful life, or adapt it to a new use. Routine repairs never qualify, and borrowing against your home for anything other than buying, building, or substantially improving it produces non-deductible interest. Those rules govern the substantial home improvements mortgage interest deduction from start to finish.
What the IRS Means by Substantial
The federal tax code lets you deduct interest on “acquisition indebtedness,” which is debt used to acquire, construct, or substantially improve a qualified residence. The statute doesn’t define “substantially improving.” The working definition comes from IRS Publication 936: an improvement is substantial if it adds to the value of your home, prolongs your home’s useful life, or adapts your home to new uses.
A project only needs to meet one of the three tests. Finishing a basement adapts the home to a new use. A full roof replacement prolongs its useful life. A kitchen overhaul with new cabinetry and appliances adds market value. Larger projects often satisfy more than one at once.
The loan itself has to be secured by the residence. An unsecured personal loan spent on a qualifying renovation produces no deduction. The debt has to use your home as collateral and be recorded under your state’s law, whether it’s a mortgage, home equity loan, or HELOC.
Projects That Typically Qualify
IRS Publication 523, which covers selling a home, carries the most detailed list of improvements the IRS recognizes as adding to basis. The same “adds value, prolongs life, or adapts to new use” standard applies, so those examples work as a guide here too.
Structural additions are the clearest cases. Adding a bedroom, bathroom, garage, deck, or porch expands the footprint and creates permanent new space.
Replacing whole building systems also qualifies. A new heating system, central air conditioning, updated wiring, a full plumbing overhaul, or a modern security system swaps aging infrastructure for components with a decades-long service life. The operative word is “system.” Replacing the whole furnace qualifies. Fixing a thermostat doesn’t.
Interior renovations count when they go past a surface refresh. A kitchen modernization involving new cabinetry, countertops, built-in appliances, and flooring is a capital improvement. So is a bathroom gut renovation. Wall-to-wall carpeting, a new fireplace, and built-in storage also appear on the IRS list.
Exterior and site work can qualify: a new roof, new siding, storm windows, a driveway, landscaping, retaining walls, fencing, and a swimming pool. Landscaping is worth flagging because routine yard maintenance obviously doesn’t count, but a designed installation that permanently changes the grounds does.
Repairs That Don’t Qualify
Publication 936 draws a hard line. Repairs keep your home in its current condition without adding value or extending its life. Repainting is the example the IRS calls out by name. Fixing leaks, filling cracks, replacing broken hardware, and patching a few damaged shingles all sit on the repair side.
There is one important exception in Publication 523: repairs done as part of a larger improvement project get folded into the improvement. Replacing a single broken window pane is a repair; replacing that window as part of a whole-house window replacement is an improvement. Repainting a room is a repair; repainting as part of a full renovation that substantially improves the home lets you include the painting cost.
This bundling rule is where homeowners either capture money or lose it. If you fold genuine repairs into a qualifying renovation, keep contractor invoices that describe the full scope. Handle the same repairs separately months later and you can’t include the cost.
How Much Interest You Can Actually Deduct
Qualifying doesn’t mean unlimited. For loans taken out after December 15, 2017, you can deduct interest on the first $750,000 of combined acquisition debt across your main home and one second home ($375,000 if married filing separately). That cap covers your primary mortgage plus any home equity debt used to buy, build, or improve the property.
If your original mortgage predates December 16, 2017, a higher limit of $1,000,000 ($500,000 if married filing separately) applies to that older debt. When you layer new improvement debt on top of a grandfathered mortgage, the combined balance is measured against these thresholds. Publication 936 provides a worksheet (Table 1) for blending old and new debt. If your combined balances exceed the limit, only a proportional share of your total interest is deductible.
The deduction covers your main home and one second home. A vacation property qualifies as a second home; a third property doesn’t. Interest on debt used to improve a rental property is a different beast entirely, handled on Schedule E as a rental expense rather than on Schedule A.
Cash-Out Refinancing and Points
Cash-out refinancing is a common way to fund big projects. Only the portion of the new loan that actually goes toward the substantial improvement counts as acquisition indebtedness. The refinanced original balance keeps its existing status, and any excess cash used for other purposes (paying off credit cards, buying a car) produces non-deductible interest.
Points work a little differently. Points paid on a loan specifically to improve your principal residence can be deducted fully in the year you pay them, but only if you meet several conditions: you itemize, the loan is secured by your main home, you use the cash method of accounting, paying points is customary in your area, the amount is reasonable, and you bring funds to closing at least equal to the points charged. If the loan is on a second home, or you miss any of those requirements, you spread the points over the life of the loan.
Mixed-Use HELOCs and Tracing the Money
People often use a single HELOC for both qualifying improvements and personal spending. Publication 936 calls this a mixed-use mortgage and requires you to split the interest between deductible and non-deductible portions based on how the borrowed funds were actually used.
The allocation method works month by month. You figure the balance in each debt category, calculate an average balance for the year, and apply principal payments first to non-qualifying personal debt, then to any grandfathered debt, then to acquisition debt. The result tells you how much of your total interest is deductible.
Sloppy records destroy this deduction. Draw $60,000 from a HELOC, spend $40,000 on a kitchen and $20,000 on a vacation, and you need to trace which dollars went where. Commingled funds without documentation cannot be allocated after the fact, and an auditor will not accept a rough estimate. The clean approach is a dedicated draw for the improvement, or a separate loan altogether, so the paper trail exists from day one.
Records to Keep
The IRS doesn’t want your receipts attached to the return, but you need them if the return is examined. For every substantial improvement, keep:
- Itemized contractor invoices and contracts that show scope, materials, and cost. A line-itemed invoice is stronger than a lump-sum “kitchen remodel.”
- Proof of payment: canceled checks, bank statements, or credit card statements with amounts and dates.
- Loan documents, including the closing disclosure showing the loan amount, date, and the property securing the debt.
- Before-and-after photographs. Not required, but cheap insurance if you have to demonstrate scope later.
- Building permits, if your jurisdiction required them. A permit is strong evidence that the work was a capital improvement rather than a minor repair.
The general audit window is three years from the date you file, six years if you underreport income by more than 25%, and unlimited for fraud. Because the same records also fix your cost basis when you sell, keep them for as long as you own the property plus three years after you file the return for the year of sale.
How to Claim It
You claim the mortgage interest deduction on Schedule A of Form 1040, meaning you have to itemize. For 2026, the standard deduction is $32,200 for married couples filing jointly, $16,100 for single filers, and $24,150 for heads of household. If your itemized deductions (mortgage interest, state and local taxes, charitable contributions, and other qualifying expenses) don’t beat the standard deduction, itemizing gains you nothing and the improvement interest gives you no benefit.
Your lender sends Form 1098 each January reporting the interest they received from you. That amount goes on line 8a of Schedule A. If only part of your loan qualifies as acquisition debt because some proceeds went to non-qualifying purposes, calculate the deductible share using the worksheets in Publication 936 and enter the adjusted figure.
If the improvement loan closed partway through the year, Form 1098 will only report interest from the origination date through December 31. You deduct only what you actually paid during the tax year. The average-balance method in Publication 936 treats the loan balance as zero for the months before origination, which can reduce your qualified loan limit for that first partial year.