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If you need cash and have equity in your home, a home equity loan or a home equity line of credit (HELOC) can be an excellent solution. However, the tax aspects of either option are more complicated than they used to be. Interest on a HELOC may be tax deductible—but there are conditions.
There are two types of home equity lending: a fixed-rate loan for a specified amount of money or a variable-rate line of credit. Depending on your need for the funds and how you plan to use them, one option may work better than the other. Interest paid on either loan, like the interest on your first mortgage, is sometimes tax deductible. Specifically, you must use the funds to renovate your home in order to get the deduction.
Key Takeaways
- Interest on a home equity line of credit (HELOC) or a home equity loan is tax deductible if you use the funds for renovations to your home—the phrase is “buy, build, or substantially improve.”
- The money must be spent on the property in which the equity is the source of the loan for it to be deductible.
- Taxpayers can only deduct interest on up to $750,000 of residential loans (up to $375,000 for a married taxpayer filing a separate return), which includes all residential debt, including mortgages and home equity loans or HELOCs.
- Older mortgages may be covered under the previous $1 million limit (or $500,000 for a married taxpayer filing a separate return).
New Rules for Home Equity Tax Deductions
Since the tax law changed in 2017, the tax deductibility of interest on a HELOC or a home equity loan depends on how you spend the loan funds. That applies to interest on loans that existed before the new tax legislation as well as on new loans. Here’s how it works.
Interest on home equity debt is tax deductible if you use the funds to renovate your home—the phrase is “buy, build, or substantially improve.” What’s more, you must spend the money on the property in which the equity is the source of the loan. If you meet the conditions, interest is deductible on a loan of up to $750,000 ($375,000 or more for a married taxpayer filing a separate return).
Note that $750,000 is the total new limit for deductions on all residential debt. If you have a mortgage and home equity debt, what you owe on the mortgage will also come under the $750,000 limit—if it’s a new mortgage. Older mortgages (before 2018) may be covered under the previous $1 million limit (or $500,000 for a married taxpayer filing a separate return).
That gives people borrowing for renovations more benefits than before. Previously, interest was deductible on up to only $100,000 of home equity debt. However, you got that deduction no matter how you used the loan—to pay off credit card debt or cover college costs, for example.
Currently, interest on home equity money that you borrow after 2017 is only tax deductible for buying, building, or improving properties. This law applies from 2018 until 2026. At that time, Congress may opt to change the rule once again.
Be aware that the 2017 tax reforms increased the standard deduction to the point that it usually no longer makes sense for many people to itemize tax deductions, making HELOC and home equity loan interest deductions basically obsolete. The standard deduction in 2025 is $15,000 for single filers and $30,000 for couples who are married and filing jointly.
Unless you have an exceptionally large HELOC or home equity loan, the interest paid on it is unlikely to be the deciding factor in taking the standard deduction or itemizing deductions. If you are already itemizing your deductions, then choosing a HELOC or a home equity loan over something like a personal loan so that you can deduct the interest may make the most financial sense for you. Keep in mind that the attractiveness of a HELOC—and its deductibility—can change if interest rates rise.
Check your particular situation carefully with a tax expert before deducting anything, as it doesn’t always make sense financially and the process can be quite complicated.
How to Claim the Home Equity Interest Deduction
If you own a home and are planning to claim the home equity loan interest deduction, there are a few things to remember:
First, you must use the money for home improvements or renovations. For example, you cannot take the deduction if you use home equity proceeds to pay for personal expenditures or consolidate credit card debt. The same goes for taking out a loan and letting the money sit in the bank as your emergency fund. What’s more, the renovations have to be made on the property on which you are taking out the home equity loan. You cannot, for example, take out a loan on your primary residence and use the money to renovate your cottage at the lake.
Next, you’ll want to keep proper records of your expenses. The odds of being audited by the Internal Revenue Service are generally low, but you do not want to take any chances. If you plan to use a home equity loan or a HELOC to pay for home repairs or upgrades, keep receipts for everything you spend and bank statements showing where the money went.
Finally, remember that this deduction is not unlimited. You can deduct the interest on up to $750,000 in home loan debts if the loans were made after Dec. 15, 2017. If your total mortgage debt is higher than that, you won’t be able to deduct all the combined interest paid. The $1 million cap applies for mortgages obtained before that date.
As interest on older mortgages retains a legacy to $1 million loans, check carefully with your accountant about what you can deduct if you have both an older mortgage and a home equity loan that qualifies for deductions.
Other Benefits of a HELOC
HELOC rates (and home equity loan rates) are only slightly higher than first mortgage rates, making HELOCs much less expensive than other loan options. Of course, whether a HELOC is a good deal or not can depend on the current interest rate environment. HELOC rates are usually set based on the prime rate, which is influenced by the federal funds rate. If the Federal Reserve raises the federal funds rate, then the prime and HELOC rates can follow suit.
Taking a HELOC also means you only borrow as much as you need—not a lump sum, as with a home equity loan. This allows you to only pay interest on the amount of your credit line that you actually use, which can be a more attractive option if you want to keep costs to a minimum. In addition, a HELOC sometimes features an option to lock in a fixed interest rate to repay the outstanding balance.
HELOCs can help you unlock larger sums of money than you might be able to borrow with a personal loan or a credit card. As a homeowner, you can borrow up to a specified amount based on the combined loan-to-value (CLTV) ratio. That includes the outstanding balance from a first mortgage and the requested funds.
Getting a HELOC when one is available also makes more cash accessible in an emergency. Again, interest on a HELOC only applies when homeowners use the money, so the cost of getting one is relatively low. Therefore, getting one can be a good move if you think you might lose your job. If you wait until after a job loss, you might not have enough credit to get a HELOC. Furthermore, banks can raise credit standards for HELOCs during an economic downturn.
Should I Get a Home Equity Line of Credit (HELOC) or a Home Equity Loan for the Tax Deduction?
If you need a large amount of cash specifically to fund either an improvement or a repair on your primary residence, and if you are already itemizing your deductions, then a home equity line of credit (HELOC) or a home equity loan is probably an economically sound choice. If you are on the fence about a property remodel, borrowing against your home just to take advantage of deducting the interest is probably not your best choice.
Can I Get a HELOC or a Home Equity Loan Without a Tax Return?
Documentation requirements will vary based on the lender that you use and your personal situation. While it is possible to get a HELOC or a home equity loan without showing your tax return, pay stubs, and so on, it is usually more expensive. Low- or no-documentation loans are very risky and were mostly banned with the passage of the Dodd-Frank Act of 2010, as they directly contributed to the mortgage crisis. Finding a HELOC or home equity loan lender that will approve your loan with no documentation may be tricky and put you at risk of becoming a victim of a lending scam.
What Expenses Count for Deducting HELOC Interest?
While the Internal Revenue Service (IRS) did not include a list of expenses that would be covered under the provisions of the Tax Cuts and Jobs Act (TCJA), their advice did include some examples of allowable home improvement expenses, such as building an addition to your home. Other purposes that qualify for the deduction if you’re using a HELOC or a home equity loan include:
- Putting a new roof on the property
- Replacing your HVAC system
- Completing an extensive kitchen or bathroom remodeling project
- Resurfacing your driveway
Is a HELOC Worth it if the Interest Isn’t Deductible?
Taking out a home equity line of credit may still be worth it even if the interest is not deductible, depending on how you plan to use the money. If you’re interested in consolidating credit card debt, for example, and if you can get a much lower rate with a HELOC, then you could save money this way. Of course, this strategy assumes that you’ll pay the HELOC down as quickly as possible to minimize interest charges and that you won’t run up new debt on the cards you’ve paid off.
Is It Smart to Use a HELOC to Invest?
Using a HELOC to invest in home improvements to your primary residence could be a smart choice if those improvements increase the home’s value and you can deduct the interest payments. On the other hand, using HELOC proceeds to purchase a separate investment property, invest in stocks, or trade cryptocurrency could all be risky moves. And you would miss out on the opportunity to deduct the interest.
The Bottom Line
Taking out a home equity loan or a HELOC just to deduct the interest on your taxes was never the best decision, and tax changes make it even less practical. If you are already planning on taking out a HELOC or a home equity loan for repairs or improvements to your primary residence, keep your documentation handy so you can show it to your tax advisor and make an informed decision on whether itemizing your deductions is a good choice.