Are Home Equity Loans Tax-Deductible?

Home equity loans are tax-deductible, but a few restrictions apply. Through 2025, the federal tax code allows you to deduct interest paid on home equity loans when the funds are used to “buy, build, or substantially improve” the home that secures the loan. 

Keep reading to learn when you can (and can’t) deduct home equity loans and how to claim this tax break if you’re eligible. 

When are home equity loans tax-deductible? 

Home equity loans and home equity lines of credit (HELOCs) give you access to cash that you can use for virtually anything. However, the interest on those loans is only tax-deductible when the money goes toward an approved use under the tax code. Changes to the tax code can expand or shrink taxpayers’ ability to claim the deduction. 

Aside from those considerations, the IRS requires you to satisfy two other criteria to deduct home equity loans:

• You must file Form 1040 and itemize deductions on Schedule A
• The home equity loan or HELOC must be associated with your main home or second home that you have an ownership interest in

Itemizing means you list individual deductions on your tax return, versus taking the standard deduction. The standard deduction is a set dollar amount you can subtract from your taxable income that’s based on your filing status. The IRS adjusts standard deduction amounts annually. 

Tax deductions, including deductions for home equity loan or HELOC interest, reduce your taxable income. That’s a good thing, as it can push you into a lower tax bracket, potentially resulting in a smaller tax bill or a larger refund. 

What are the current tax laws on home equity loan deductions? 

The Tax Cuts and Jobs Act of 2017 introduced new home equity loan deductions guidelines. Before 2018, home equity loans and HELOC interest were tax-deductible up to certain limits, regardless of how the money was used. 

From 2018 through the end of 2025, home equity loans are only deductible when you’re using the money to:

• Buy a home
• Build a home
• Substantially improve your home

The IRS doesn’t specify what it means to “substantially improve” a home using a home equity loan or HELOC. Some examples of when you might be able to deduct home equity loan interest include: 

• Replacing an outdated HVAC system with a new one
• Repairing or replacing your roof
• Installing support columns in your crawlspace to reinforce your home’s foundation
• Renovating your kitchen and other living spaces
• Building an addition or deck
• Resurfacing a driveway

Talking to a tax expert about what qualifies as a substantial improvement is always a good idea.

Also, you should know that there are limits on the amount you can deduct. You can deduct interest on the first $750,000 of indebtedness ($375,000 if filing single or married filing separately). Before the Tax Cuts and Jobs Act, the limits were $1 million and $500,000, respectively. 

Ask the expert

Erin Kinkade

CFP®

If you feel overwhelmed by the tax rules surrounding HELOCs, engage with a CPA or other financial professional well-versed in tax law to help walk you through the tax-deductibility rules of a home improvement using a HELOC. If you are still uncertain and want to feel more secure, you can request a private letter ruling (PLR) from the IRS (ideally, do this with guidance from a tax professional). A PLR is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s represented facts. A PLR is issued in response to a written request submitted by a taxpayer.

When is home equity loan interest not tax-deductible? 

Under the current tax rules, home equity loan interest is not tax-deductible when it’s used for anything other than buying, building, or substantially improving a home that’s secured by the loan. 

That means that you wouldn’t be able to deduct the interest paid on a home equity loan or HELOC if you’re using it to:

• Consolidate credit cards or other forms of debt
• Pay medical bills
• Fund college expenses for yourself or one of your children
• Pay for a vacation
• Finance a wedding
• Buy new furniture or a car
• Cover any other type of personal expense
• Start a business

Assuming you are using the proceeds for an approved person, you’d still have to itemize to claim the deduction. Otherwise, you’d be ineligible. 

Itemizing can yield a larger tax break than claiming the standard deduction if you have a lot of home equity loan interest to deduct, or you have other deductible expenses to itemize. Examples of other itemizable deductions include charitable contributions, state and local property taxes, and traditional IRA contributions. 

How to claim the home equity loan interest deduction on your taxes 

Deducting home equity loan interest on your taxes is fairly straightforward. You’ll just need to have the right forms to include on your tax return, along with documentation of how you spent the loan proceeds. 

1. Verify that you’re eligible. You’ll first need to make sure you’re eligible to claim the deduction. Again, eligibility is based on how much indebtedness you have, how you used the loan proceeds, and whether you itemize your tax return. 
2. Organize your documents. You’ll need a copy of Form 1098, Mortgage Interest Statement, to see how much interest you paid toward your home equity loan for the year. Your lender must mail this to you by the end of January each year. You’ll also need copies of receipts, canceled checks, credit card statements, and other documents showing how you used the loan to buy, build, or improve your home. 
3. Enter itemized deductions. If you’re using a tax filing software, it should prompt you to choose between standard and itemized deductions. You can choose the itemized option, then enter the home equity loan interest amount you want to deduct. This information goes on line 8 of Schedule A. 

Does the IRS ask you to attach copies of your receipts showing how you spent your home equity loan or HELOC? No, but having these documents on hand is still important in case you’re selected for an audit. 

If you’re interested in a home equity loan, it’s helpful to compare lenders and shop around for the best rates. Getting multiple home equity loan rate quotes can give you an idea of how much it will cost to borrow and the amount of interest you might be able to deduct when it’s time to file your taxes.