Are Home Equity Loans Tax Deductible?

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Interest on a home equity loan can be tax deductible, but it depends on how the money is used.

Interest on home equity loans (and HELOCs) is deductible only when the money is used to buy, build, or substantially improve the home that secures the loan, and only if you itemize deductions.

Since 2018, federal rules have tightened, limiting deductions to qualified uses and capping the total mortgage debt eligible for the write-off.

Understanding Home Equity Loans and Tax Deductibility

A home equity loan is a second mortgage secured by your home, typically disbursed as a lump sum with a fixed interest rate and fixed payments.

If interest on a home equity loan is tax deductible, that means you can subtract qualifying interest from your taxable income if you itemize deductions.

Since 2018, home equity interest is deductible only when the borrowed funds are used for IRS-qualified purposes tied to the home that secures the loan. Personal uses generally don’t qualify.

Keep in mind that tax laws are complex and subject to change. Lower does not provide tax advice. Please consult a tax advisor or CPA to determine whether home equity loan interest is deductible for you.

Tax Cuts and Jobs Act Impact on Home Equity Loan Interest

Before the Tax Cuts and Jobs Act (TCJA), homeowners could deduct interest on up to $100,000 of home equity debt regardless of how the funds were used, according to Congress’s overview of the changes. The TCJA suspended that broad provision for tax years 2018–2025 and narrowed deductions to home acquisition and improvement uses.

Those changes were further extended by the more recent One, Big Beautiful Bill Act.

Here’s a comparison of how the rules have changed:

Rule element	Before 2018	2018 to present
Home equity interest	Deductible on up to $100,000 of home equity debt regardless of use	Deductible only if funds are used to buy, build, or substantially improve the home securing the loan
“Use of funds” requirement	Not required for home equity debt	Strict tracing to qualified use required
Debt limit interaction	Separate $100,000 home equity allowance	Counts toward overall mortgage debt limit (see limits below)

Qualified Uses for Tax-Deductible Home Equity Loan Interest

To qualify, interest must be on debt used to buy, build, or substantially improve the home that secures the loan. The IRS treats “substantial improvement” as work that adds value, prolongs the home’s useful life, or adapts it to new uses, according to the National Association of guide on mortgage interest deduction.

Here are some examples of qualifying uses:

Building an addition, finishing a basement or attic, or adding a bathroom
Major kitchen remodels; replacing roof, windows, or siding
Upgrading HVAC, electrical, plumbing, or installing solar panels
Constructing a garage, deck, or substantial landscaping tied to the property

Here’s what wouldn’t qualify as tax-deductible:

Paying credit card balances or personal loans
Tuition, medical bills, or everyday living expenses
Vacations, weddings, or vehicles
Investing in property other than the home that secures the loan

Remember that the loan must be secured by the same property that’s improved, and you must trace the funds to the qualifying work.

Limits on Deductible Mortgage Interest for Home Equity Loans

Your deduction is also subject to the overall mortgage interest limits. For loans taken out on or after December 16, 2017, interest is deductible only on combined mortgage debt up to $750,000, or $375,000 if married filing separately.

For mortgages taken out on or before December 15, 2017, the prior $1,000,000 cap, or $500,000 for married filing separately, applies. These caps cover all mortgages on your main home and one other residence, including first mortgages, refinances, and home equity loans. on your main home and one other residence.

Here are some mortgage debt caps at a glance:

Loan origination timing	Combined mortgage debt cap	Married filing separately
On or after Dec. 16, 2017	$750,000	$375,000
On or before Dec. 15, 2017	$1,000,000	$500,000

Documentation Needed to Claim Home Equity Loan Interest Deduction

Good records are essential. Your lender will generally issue IRS Form 1098 reporting the mortgage interest you paid for the year. You should also keep documentation that proves funds were used for qualifying improvements, including receipts, contracts, and bank records.

Here’s a deduction documentation checklist

Document	Why it matters	Keep for
IRS Form 1098	Reports total mortgage interest paid	Tax filing and records
Contractor agreements and invoices	Show scope and cost of qualifying improvements	At least 3–7 years
Receipts for materials and permits	Verifies substantial improvement expenses	At least 3–7 years
Bank statements or home equity loan disbursement records	Traces loan proceeds to eligible uses	At least 3–7 years
Closing disclosures and promissory notes	Confirms secured debt status and dates	Loan life + 3–7 years
Photos or inspection reports (optional)	Corroborates improvement work	Optional but helpful

The Bottom Line

Home equity loan interest is tax deductible, but with limitations. You need to use the funds to buy, build, or substantially improve the home that secures the loan. Other common uses, like debt consolidation, aren’t tax deductible.

Frequently asked questions about home equity loan tax deductibility

When is home equity loan interest tax-deductible?

Home equity loan interest is deductible only if you use the funds to buy, build, or substantially improve the home that secures the loan.

What are the deduction limits?

Interest is deductible only on combined mortgage balances up to $750,000 for most loans originated after December 15, 2017 (or $1,000,000 for older loans), with lower limits if married filing separately.

Do I need to itemize deductions to claim this?

Yes. You must itemize deductions. If the standard deduction is higher, you may see no tax benefit.

What documentation do I need?

You should keep Form 1098 from your lender. You should also keep records, including receipts, contracts, and bank statements, showing loan funds were used for qualifying improvements.

Did the TCJA rules expire?

The One, Big Beautiful Bill Act of 2025 made some TCJA rules permanent, including keeping the mortgage-interest debt cap at $750,000.

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Are Home Equity Loans Tax Deductible?

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