Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Home Equity Home Equity Loans Are Home Equity Loans Tax-Deductible? Updated Jul 14, 2023   |   7-min read   |   This article has been reviewed by a Certified Financial Planner™ for accuracy. Written by Rebecca Lake, CEPF® Written by Rebecca Lake, CEPF® Expertise: Student loans, mortgages, home-buying, credit, debt, personal loans, education planning, insurance, investing, small business Rebecca Lake is a certified educator in personal finance (CEPF®) and freelance writer specializing in finance. Learn more about Rebecca Lake, CEPF® Reviewed by Erin Kinkade, CFP® Reviewed by Erin Kinkade, CFP® Expertise: Insurance planning, education planning, retirement planning, investment planning, military benefits, behavioral finance Erin Kinkade, CFP®, ChFC®, works as a financial planner at AAFMAA Wealth Management & Trust. Erin prepares comprehensive financial plans for military veterans and their families. Learn more about Erin Kinkade, CFP® The Tax Cuts and Jobs Act of 2017 introduced new guidelines that reduced the number of instances in which homeowners can deduct the interest they pay on home equity loans and home equity lines of credit (HELOCs). Through December 2026, this act will allow you to deduct interest on these types of loans as long as you use the money to “build, buy, or substantially improve” the home that secures the loan. Tax deductions lower your taxable income for the year. Claiming a deduction for home equity loan interest could help to reduce your tax liability or increase the size of your refund. In this guide: In what situations are home equity loans deductible?Are there tax differences between a home equity loan and line of credit?How have tax law changes affected these tax deductions?How do you claim the tax deduction?Is it worth using a home equity loan if it isn’t tax-deductible? In what situations are home equity loans deductible? Homeowners can now deduct interest paid to home equity loans and HELOCs if they use the money to buy, build, or substantially improve a home secured by the loan. The IRS doesn’t go into detail regarding “substantial improvement.” But generally, it means anything that adds significant value to the home or increases its usefulness. See the table below for guidance on whether several expenses qualify for a tax deduction: Yes, if used to…No, if used to…Build or buy a home that’s secured by the loanReplace the roof on your homeUpgrade your HVAC systemInstall a whole-house generator or solar panelsBuild an additionMake your kitchen or bathroom accessible for a resident with disabilitiesConsolidate credit cards or other debtsPay education expenses for yourself or your childrenCover medical or veterinary billsPay day-to-day living expensesFund investments or business expensesRenovate your kitchenPay funeral or burial expenses for a loved one who has passed away What are the tax differences between a home equity loan and a line of credit? A home equity loan and a home equity line of credit both allow homeowners to tap into equity. Your equity is your home value today minus the amount you owe on your mortgage. A home equity loan and a HELOC give you access to cash from your equity, but they do so differently. Here are the key differences between a home equity loan and a HELOC: Home equity loanHELOCInterest rates Fixed rates are typical.Variable rates are more common, but lenders may also offer fixed rates.Distribution of fundsPaid in a lump sum, which borrowers can use to fund various expenses.Gives access to a revolving credit line, which borrowers can draw against as needed, similar to a credit card.Repayment termsMonthly repayment begins once the loan is funded.Loan terms can extend from 5 to 30 years.Borrowers may make interest-only payments during an initial draw period (typically 10 years), followed by principal plus interest payments during the repayment period (as long as 20 years). Both a home equity loan and a HELOC represent a type of second mortgage when a primary mortgage is in place on the home. However, it’s possible to have a first-lien home equity loan or HELOC if you use the loan to pay off a primary mortgage. The Tax Cuts and Jobs Act’s interest deduction applies to home equity loans and HELOCs. As long as you use the funds for an eligible purpose, you can deduct the interest, regardless of whether you have a home equity loan or a HELOC. How have tax law changes affected these tax deductions? Before the Tax Cuts and Jobs Act passed, homeowners could deduct up to $100,000 in interest paid for home equity loans and HELOCs for any reason. In 2018, the scope of the deduction narrowed to cover only the situations above. Unless Congress extends them, these changes will remain in effect through December 2026. Updating the tax code didn’t just change which expenses qualify for the home equity loan interest deduction; it also altered the deduction amount: Married, filing separatelyAll othersCurrent (2023)$375,000$750,000Before Tax Cut and Jobs Act$500,000$1 million Those limits apply across all outstanding loans associated with a single property. So you can deduct the interest on your first mortgage and the interest on your home equity loan up to the limits above based on your tax filing status. The debt owed on the properties cannot be greater than the value of the properties. How do you claim the tax deduction? To claim a deduction for the interest you paid on a home equity loan or HELOC, the first step is determining whether you’re eligible. Be sure you used the funds from the home equity loan or HELOC to build, buy, or substantially improve the home that serves as collateral. Next, you’ll need to figure out how much interest you’ve paid on the home equity loan. To do that, you can: Review your most recent loan statement.Call your loan servicer.Check your Form 1098 Mortgage Interest Statement. (Lenders send these out at the beginning of the year.) Then you can start organizing the paperwork you’ll need to claim the deduction on your taxes. That includes your Form 1098 Mortgage Interest Statement from the lender, documentation of how you used the loan funds, and any additional interest expense you incurred. The IRS requires you to itemize mortgage interest deductions on Schedule A of Form 1040. Understanding the difference is essential if you’re used to claiming the standard deduction. The standard deduction allows you to deduct a set amount from your annual income based on your filing status: SingleMarried, filing jointlyStandard deduction (2023)$13,850$27,700 When you itemize, you list your separate deductible expenses and deduct the appropriate amount. If your expenses exceed the limits in the table above—for instance, if you’re married and filing jointly, and your expenses total $33,500—you’ll benefit from itemizing your deductions. You should claim the standard deduction if your itemized deductions are below or equal to the standard deduction limits. If you’re unsure, a tax professional can help you figure out the best way to handle home equity loan interest deductions. Is it worth using a home equity loan if it isn’t tax-deductible? A tax break in the form of an interest deduction is a terrific incentive to consider a home equity loan. But a home loan can be valuable even if the interest is not deductible. For example, you might consider a home equity loan if you need money to: Consolidate credit cards and other high-interest debtsPay for an expensive medical procedure your insurance doesn’t coverEliminate primary mortgage debt for the homeFund an emergency expense that you can’t cover with savings However, keep this in mind: Your home secures a home equity loan. If you default, you risk losing your house to foreclosure. It may be worthwhile to consider alternatives. For instance, unsecured personal loans can provide you with money to cover a wide range of expenses. You don’t have to put your home up as collateral, and some lenders offer loans as high as $100,000. You can’t deduct the interest you pay on a personal loan, but you might consider one if you don’t have sufficient equity to borrow against or would rather not put your home up as collateral. Remember that a higher credit score can make qualifying for the best loan terms and the lowest rates easier when comparing personal loan options.