Are HELOCs tax-deductible?

One of the pleasures of homeownership is changing it how you’d like. Whether it’s adding central heating or a complete kitchen remodel, you might be considering a home equity line of credit (HELOC) to pay for it.  

The interest you pay on a HELOC could be deductible, but only if the money is used to buy, build, or substantially improve the home that secures the loan, and you itemize deductions. Interest on HELOC funds used for personal expenses is generally not deductible under current IRS rules.   

Your best resource for information on your specific tax situation is a tax professional. However, it's smart to learn the basics about deducting HELOC interest to help you make informed borrowing decisions. We'll walk you through it.

When is HELOC interest tax-deductible?

The Tax Cuts and Jobs Act of 2017 significantly changed when and how HELOC interest could be deducted from your taxes. Here are the five essential facts to remember:

1. The interest is only deductible if you use the funds to buy, build, or substantially improve your home.

2.  If the HELOC was used for personal expenses, such as consolidating debt, buying a car, or covering tuition costs, that portion of the interest isn’t deductible.

3. Your total home-related indebtedness (your regular mortgage plus your HELOC) is limited to $750,000 for most taxpayers.

4. To claim the HELOC interest deduction on your federal income tax return, you must itemize deductions on Schedule A of Form 1040. 

5. The IRS requires proof of how the funds were spent. That means saving all receipts and invoices.

When isn’t HELOC interest tax-deductible?

HELOC interest isn’t tax-deductible when the money you borrow is spent on anything other than buying or substantially improving a home. Here are some examples of expenses you might use a HELOC for that won't qualify for HELOC interest deductions:

• Painting the interior of the home

• Routine home maintenance projects, like replacing a hot water heater

• Making minor home improvements

• Paying off credit cards

• Covering medical bills

• Paying tuition

• Taking a vacation

• Paying for a wedding

Sample of repairs vs. home improvements

If you’re not sure whether your projects qualify as substantial, you may want to speak with a tax professional who can guide you.

HELOC vs. home equity loan tax deduction rules

HELOCs and home equity loans operate under nearly identical rules regarding interest deductibility. The only real difference is how the two loan types work. A HELOC is a revolving line of credit, and a home equity loan is disbursed in a lump sum.

When conducting a comparison of HELOC vs. home equity loan, it’s good to know that the following rules apply to both loan types:

• Funds must be used to buy, build, or substantially improve your primary or second home.

• Interest on any portion of funds used for personal expenses isn’t deductible.

• Home-related indebtedness is limited to $750,000 for most taxpayers.

• You must itemize deductions on your federal return to deduct the interest. 

• The IRS requires proof of how the funds were spent before granting the deduction.

Do you have to itemize to deduct HELOC interest?

Yes, you generally need to itemize your tax deductions to deduct eligible HELOC interest. Whether itemization is worth the extra deductions depends on your situation. Before taking out a HELOC, consult with a financial advisor or tax expert to determine whether it makes sense for you to itemize your tax deductions.

How much HELOC interest can you deduct?

To take the deduction, your mortgage debt plus the HELOC can’t exceed $750,000 for married couples filing jointly. For single filers, the total debt cannot exceed $375,000.

What records do you need to deduct HELOC interest?

To claim the interest deduction, you’ll need:

• IRS Form 1098, Mortgage Interest Statement

• Receipts for all improvements

By providing your documentation upfront, you could help the IRS quickly determine whether your purchases qualify for the deduction. It could also speed up the time it takes for the IRS to process your tax return.