Are home equity loans and HELOCs tax-deductible under current tax law?

The interest on a home equity loan or home equity line of credit (HELOC) could be tax-deductible under specific conditions set by the Internal Revenue Service (IRS). The catch is that you must use the funds “to buy, build, or substantially improve” the home that secures the loan. If that’s the case, the interest could qualify for a deduction.

Tax rules around home equity borrowing have changed in recent years. Knowing where you stand before you borrow could affect your tax outcome, so here’s what the IRS currently requires and how to claim a deduction if you qualify.

Note: We'll go over the basics of home equity loan deductions in this guide, but we're not tax experts. Consult a tax professional to determine if your home equity loan or HELOC qualifies for any deductions in your situation.

When home equity loan or HELOC interest could be tax deductible

Under current IRS rules, interest on a home equity loan or HELOC could be deductible when a borrower uses the funds “to buy, build, or substantially improve” the home that secures the loan. “Substantially improve” means a capital improvement, or something that adds value to the home, extends its useful life, or adapts it to a new use.

The same rules apply whether you have a home equity loan or a HELOC. The IRS does not distinguish between the two for deductibility purposes. The key factor is how the money is spent, not the loan structure.

Examples of uses that could qualify:

• Adding a room, such as a bathroom or garage

• Fully remodeling a kitchen or bathroom

• Replacing a roof or siding

• Installing a new heating, ventilation, and air conditioning (HVAC) system or central air

• Building a deck, patio, or fence

• Finishing a basement or attic

• Installing new windows throughout the home

Examples of uses that do not qualify:

• Consolidating credit card debt or other personal debt

• Paying for tuition or education expenses

• Covering medical bills

• Taking a vacation or paying for a wedding

• Funding everyday expenses or a major purchase unrelated to the home

If you split a home equity loan between a kitchen remodel and a vacation, you could only deduct interest on the portion that went toward the remodel.

A tax deduction is a way to lower your taxable income. If you earned $80,000 and you have a $5,000 deduction, you’d pay taxes on $75,000. Your lender should send you an annual statement showing you how much interest you paid on the loan that year.

Capital improvements vs. repairs

The IRS distinguishes between capital improvements and repairs. A capital improvement adds value to the home, extends its useful life, or adapts it for a new use. A repair restores the home to its existing condition. Repairs generally don’t qualify for the interest deduction, even when they’re necessary.

If you’re not sure whether your project qualifies as a capital improvement, talk to a tax professional to help confirm eligibility. If you use a HELOC or home equity loan for a remodel for work in both categories, keep separate records for the qualifying portion.

IRS mortgage debt limits for the interest deduction

You could deduct home equity loan or HELOC interest on up to $750,000 of qualifying mortgage debt ($375,000 if married filing separately). This limit includes your primary mortgage balance and any home equity loan or HELOC funds used for a qualifying purpose. 

Here’s an example:

• You owe $500,000 on your primary mortgage and take out a $200,000 home equity loan for a major renovation. Your total qualifying mortgage debt is $700,000, within the $750,000 limit. The full interest on both loans could be deductible if all other conditions are met.

• Your primary mortgage is $600,000, and you take out a $200,000 HELOC for a substantial renovation. Your total qualifying mortgage debt is $800,000. You could deduct interest on only $750,000.

If your mortgage was taken out on or before December 16, 2017, the previous, higher limit of $1 million ($500,000 if married filing separately) still applies. That older threshold was grandfathered in to protect homeowners who borrowed years ago.

How the Tax Cuts and Jobs Act changed the rules

Before 2018, homeowners could deduct interest on up to $100,000 of home equity debt regardless of how the money was used. The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated that separate “home equity debt” category. Starting in 2018, interest is only deductible if the borrower uses the funds to buy, build, or substantially improve the home that secures the loan.

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, made these TCJA changes permanent. The $750,000 debt cap and the “buy, build, or substantially improve” requirement are now permanent law and apply to all new mortgages. Mortgages that qualify under the pre-2018 grandfather rules continue to follow the previous, higher debt limits.

Itemizing vs. taking the standard deduction

To claim a deduction for home equity loan or HELOC interest, you must itemize deductions using Form 1040, Schedule A, instead of taking the standard deduction. For tax year 2026, the standard deduction is:

• $32,200 for married filing jointly

• $24,150 for head of household

• $16,100 for single or married filing separately

Itemizing generally makes financial sense if your total itemized deductions exceed the standard deduction for your filing status. Itemized deductions can include mortgage interest, state and local taxes, charitable contributions, and other qualifying expenses. 

For some homeowners, the standard deduction could be high enough that itemizing doesn’t save more. Check the numbers before assuming this deduction will lower your bill. A tax professional could help you determine whether itemizing or taking the standard deduction results in a lower total tax bill.

How is a home equity loan similar to a mortgage?

A home equity loan is a type of mortgage. If you already have a primary mortgage, a home equity loan is a second mortgage. Interest on a primary mortgage used to buy a home is generally deductible under IRS rules. Interest on a home equity loan is only deductible in specific cases.

A home equity loan and primary mortgage work similarly in many ways:

• Both are secured loans that use your home as collateral. If you do not repay the loan, you could lose your home.

• Homeowners insurance is required.

• Your credit, income, and debt-to-income (DTI) ratio must meet the lender's requirements. 

• Both typically carry a fixed interest rate with equal monthly payments over the life of the loan.

• A professional appraisal or digital valuation is required to determine the home's current market value.

How to claim the home equity loan/HELOC interest deduction

These are the basic steps to claim a mortgage interest deduction:

1. Consult a tax professional. A tax advisor could help you confirm eligibility, calculate whether itemizing actually saves you money, and make sure your documentation meets IRS requirements.

2. Confirm your loan qualifies. You must use the funds to buy, build, or substantially improve the home securing the loan. You can deduct interest on up to $750,000 of total qualifying mortgage debt ($375,000 if married filing separately).

3. Gather Form 1098. Your lender will send you IRS Form 1098 (Mortgage Interest Statement) each year, showing the total interest you paid on your home equity loan or HELOC. You will receive separate 1098s for your primary mortgage and your home equity loan or HELOC if you have both.

4. Collect documentation. Keep receipts, invoices, contracts, and proof of payment for every home improvement project funded by the loan. The IRS could ask you to trace how you spent the borrowed funds.

5. File Schedule A. Report your mortgage interest deduction on Schedule A (Form 1040).

What records to keep for the interest deduction

The IRS puts the burden of proof on you to show that the funds you borrow are used for qualifying purposes. Save these records for every home equity loan or HELOC you use for improvements:

• Loan documents showing the amount borrowed and the property securing the loan

• Form 1098 from your lender for each tax year

• Contractor contracts and invoices for all home improvement work

• Receipts for materials purchased for qualifying improvements

• Proof of payment such as bank statements, canceled checks, or credit card statements showing payments to contractors

• Before and after photos of improvement projects

• Building permits for projects that required them

The IRS recommends keeping tax records for at least three years from the date you filed the return. Keep records for up to seven years to provide extra protection if the IRS examines the return later. For more on how a HELOC works and how disbursements appear in your records, review your loan agreement and the draw history your lender provides.

Talk to a mortgage advisor about how a HELOC through Achieve Loans could fit your next home improvement project. Check your estimated rate and terms with no impact to your credit.