For homeowners looking to tap into their property’s value, home equity loans and lines of credit (HELOCs) remain popular financing options. But the question many homeowners ask is whether the interest paid on these loans qualifies for tax deductions. The answer isn’t straightforward and depends on several key factors, especially following significant tax law changes in recent years.
How Tax Rules Changed for Home Equity Loans
The Tax Cuts and Jobs Act (TCJA) of 2017 drastically changed the tax landscape for home equity borrowers. Before this legislation, homeowners could deduct interest on home equity loans regardless of how they used the funds—whether for home improvements, debt consolidation, education expenses, or other personal costs.
However, under current tax law (effective 2018-2025), the rules are more restrictive:
- Pre-2018 and Post-2025: Interest is/will be deductible regardless of how you use the loan proceeds
- 2018-2025 (current period): Interest is only deductible if the funds are used to “buy, build, or substantially improve” the property that secures the loan
This means that if you take out a home equity loan today and use it to pay for your child’s college education or consolidate credit card debt, the interest is not tax-deductible. However, if you use those same funds to add a new bedroom or remodel your kitchen, you may qualify for the deduction.
Qualifying Criteria for Tax-Deductible Interest
To deduct interest on your home equity loan, you must meet all of the following conditions:
- Purpose requirement: The loan must be used to buy, build, or substantially improve the home that secures the loan
- Property specificity: The improvements must be made to the same property used as collateral for the loan
- Loan limits: Your total mortgage debt (including primary mortgage and home equity loans) must not exceed:
- $750,000 for married filing jointly and single filers ($375,000 for married filing separately) for loans taken after December 15, 2017
- $1 million for married filing jointly and single filers ($500,000 for married filing separately) for loans taken before December 15, 2017
- Qualifying residence: The loan must be secured by your primary residence or a second home
- Value limitation: The total debt cannot exceed the home’s value
It’s worth noting that these rules apply equally to both home equity loans (which provide a lump sum) and home equity lines of credit (HELOCs), which function more like credit cards.
What Qualifies as “Substantial Improvement”?
The IRS hasn’t provided an exhaustive list of what constitutes a “substantial improvement,” but generally, improvements that increase your home’s value, prolong its useful life, or adapt it to new uses qualify. Examples include:
- Building an addition or extra room
- Installing a new roof
- Replacing HVAC systems
- Major kitchen or bathroom renovations
- Adding a swimming pool
- Finishing a basement
- Installing energy-efficient windows
- Complete garage renovation
- Resurfacing a driveway
Routine repairs and maintenance, such as painting or fixing a leaky faucet, typically don’t qualify as substantial improvements on their own, though they may if they’re part of a larger renovation project.
Standard Deduction vs. Itemizing: What Makes Sense?
Even if your home equity loan interest qualifies for deduction, you’ll need to itemize deductions on your tax return to claim it. With the TCJA significantly increasing standard deduction amounts, fewer taxpayers find it beneficial to itemize.
For the 2025 tax year, standard deduction amounts are:
- Single filers: $15,000
- Married filing jointly: $30,000
- Head of household: $22,500
Unless your total itemized deductions—including mortgage interest, state and local taxes (capped at $10,000), charitable contributions, and eligible medical expenses—exceed these amounts, taking the standard deduction may result in greater tax savings.
Documentation: The Key to Successful Deductions
If you do claim the deduction, proper documentation is crucial for substantiating your claim, especially in case of an IRS audit. Keep records of:
- Loan documentation: Loan agreements showing the secured property
- Form 1098: Mortgage interest statements from your lender
- Expense receipts: Detailed invoices from contractors, suppliers, and service providers
- Bank statements: Records showing payments for qualifying improvements
- Before and after photographs: Visual evidence of improvements
- Building permits: Official documentation for major renovations
- Contractor agreements: Contracts outlining the scope of work and costs
These documents should be retained for at least three years after filing your return, which is the standard IRS audit window for most taxpayers.
Frequently Asked Questions
Is home equity loan interest tax deductible?
Answer: Yes, but with specific conditions. Home equity loan interest is tax deductible only if you use the funds to buy, build, or substantially improve the home that secures the loan. This rule applies to loans taken between 2018 and 2025. Additionally, your total mortgage debt (including your primary mortgage and home equity loans) must not exceed $750,000 for most filers. The interest is not deductible if you use the funds for other purposes like debt consolidation, education expenses, or personal costs.
Can I deduct interest if I use part of my HELOC for home improvements and part for other expenses?
Answer: Yes, but only partially. You can only deduct interest on the portion used for qualifying home improvements. You’ll need to track spending carefully and allocate interest proportionally. For example, if you borrow $100,000 and use $60,000 for home improvements, you can deduct 60% of the interest paid.
Is interest deductible if I use a home equity loan on my primary residence to improve my vacation home?
Answer: No. The improvements must be made to the same property that secures the loan. If you want to improve your vacation home, the loan should be secured by that property to qualify for the interest deduction.
Can I still claim the deduction if I told my lender the loan was for a different purpose?
Answer: What matters to the IRS is how you actually used the funds, not what you told the lender. However, this discrepancy could create issues during an audit. It’s best to be consistent in your documentation and ensure you have evidence showing how the money was actually spent.
If I refinance my home equity loan, does the interest remain deductible?
Answer: If the refinanced loan still meets all the qualifying criteria—including being used for home improvements and not exceeding loan limits—then the interest should remain deductible. However, if you cash out additional equity during refinancing and use it for non-qualifying purposes, that portion won’t be deductible.
Will the rules change after 2025?
Answer: According to current legislation, the pre-TCJA rules are scheduled to return after 2025, which would allow interest deductions regardless of how loan proceeds are used. However, Congress could extend the current rules or implement new ones before that time. Tax planning should account for potential changes.
Maximizing Your Tax Benefits
If you’re planning to take out a home equity loan and want to maximize potential tax benefits, consider these strategies:
- Time your improvements: If possible, consolidate home improvement projects to make the most of your deductible interest
- Keep improvements and personal expenses separate: Use different funding sources for non-deductible expenses
- Consider a cash-out refinance: In some cases, this might offer better terms and similar tax benefits as home equity loans
- Consult a tax professional: Tax laws are complex and your situation may have unique aspects that affect deductibility
- Track expenses meticulously: Create separate folders for each improvement project with all relevant documentation
Conclusion
The tax deductibility of home equity loan interest has become more restrictive since 2018, focusing benefits exclusively on homeowners who invest in improving their properties. While this narrows the advantage compared to pre-2018 rules, it still represents a significant potential tax benefit for those undertaking substantial home improvements.
Before making any decisions based on potential tax advantages, consult with a qualified tax professional who can assess your specific situation. Remember that tax benefits should be just one factor in your borrowing decisions—loan terms, interest rates, closing costs, and your overall financial situation should all play important roles in determining whether a home equity loan is right for you.
As with all tax matters, staying informed about changing legislation is essential, particularly as we approach 2026 when the current rules are scheduled to expire unless Congress takes action to extend or modify them.
