Home equity loans are something a lot of homeowners start looking into when bills pile up or a big expense pops up out of nowhere. Borrowing against the same home you live in can feel a bit unfamiliar at first, but it’s actually pretty common. As you pay down your mortgage and your home value goes up, you start building equity in the background. That’s usually when the question comes in: Is home equity loan interest tax-deductible?
The average homeowner is sitting on about $295,000 in home equity. A lot of that value is just sitting there quietly, even though it can often be tapped when needed. So it’s no surprise people start wondering how to use it wisely without getting hit with unexpected tax costs.
How Much Is Your Home Worth Now?
Home values have rapidly increased in recent years. How much is your current home worth now? Get a ballpark estimate from HomeLight’s free Home Value Estimator.
Is home equity loan interest tax deductible?
Simply put, taxpayers can deduct the interest on a home equity loan or a home equity line of credit (HELOC) if they use the money to fix up or improve the home that the loan is tied to.
Some additional rules and limits apply when loan amounts get larger or when multiple home equity loans are combined. But since the average home equity loan is around $144,000 and HELOC balances average about $45,000, most homeowners don’t run into the more complicated IRS Publication 936 limits on deducting mortgage interest.
Nevertheless, we will share this overview note provided by the IRS:
“Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.”
A “substantial improvement” is something that meaningfully upgrades your home, not just routine upkeep. It counts if it increases your home’s value, extends how long it lasts, or changes it so it can be used in a new way.
Simple fixes that just keep things in good shape, like painting or small repairs, don’t usually count on their own. But if that painting is part of a bigger renovation that actually improves the home, then those costs can be included as part of the improvement.
In IRS terms, the interest you pay on the borrowed money is considered “home acquisition debt.” This basically means the interest is treated like part of the cost of acquiring or improving your home, not just a general personal loan expense. In practice, that’s why the IRS ties the deduction so closely to how the borrowed money is actually used.
Does your home equity loan qualify?
Under this “buy, build, or substantially improve” test, you may be able to deduct home equity loan or HELOC interest if the money is used to:
- Buy a primary or second home*
- Build a primary or second home
- Make home improvements to your primary or second home
*A qualified second home must still be a primary residence, such as a vacation home where you actually reside, not a rental or income property with tenants.
If you used the borrowed money for anything else, such as consolidating debt, buying a car, boat, or RV, or paying for your daughter’s wedding, you cannot deduct the loan interest.
In summary, if you use the funds for a qualified renovation or repair on a qualified residence, you can deduct some or all of your home equity loan or HELOC interest on your taxes. The test begins with the phrase “buy, build, or substantially improve,” and what percentage of the loan money was applied to this purpose.
Also, both you and your lender must intend that the loan be repaid, and the renovation work on your home must happen in the same calendar year that you borrowed the money.
If you happen to be an outside-the-average borrower with a large, qualified equity-backed loan, here are the loan amount limits the IRS has set:
- Individual and married couples filing jointly: Interest paid on up to $750,000 of your mortgage debt
- Married couples filing separately: Interest paid on up to $375,000 of your mortgage debt
What about money borrowed after 2025?
The year 2025 is a key cutoff point because under the 2017 Tax Cuts and Jobs Act (TCJA), the rules on home equity loan interest were originally set to change after that date. Those stricter limits were only meant to last through 2025, with expectations that the rules might loosen afterward. But the One Big Beautiful Bill Act (OBBBA) made the TCJA rules permanent instead.
That means home equity loan and HELOC interest is still generally only deductible when the money is used to buy, build, or substantially improve a home. If the funds are used for things like paying off credit cards or other personal expenses, the interest usually won’t qualify. So even going forward, the key factor is still how the money is used.
How to claim a home equity loan interest tax deduction
If you use a professional tax service or online tax software like IRS Free File, TurboTax, TaxSlayer, or H&R Block, the tax preparer or program will ask if you paid any interest on a primary mortgage, home equity loan, or HELOC. Follow the instructions provided to determine if you will take the standard deduction or itemize your deductions and what those itemized deductions should be.
If you handle your own taxes, you will fill in the qualified interest amount paid on IRS Schedule A (Form 1040), Itemized Deductions. Your home equity loan or HELOC lender should send you a Form 1098, Mortgage Interest Statement, which indicates how much you spent on interest during the tax year.
Whether you are using tax software, a pro service, or manually filing, it’s important to compare the loan provider’s Form 1098 with your records to make sure it’s correct. If necessary, request an amended 1098 before you proceed.
While we’re keeping our information simple, for those who want to see the government lingo, here’s how the IRS explains it in Publication 936:
“Generally, you can deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a. However, any interest showing in box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by the property, is not deductible if the proceeds were not used to buy, build, or substantially improve a qualified home.
If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the portion of the deductible interest that was omitted from Form 1098 on line 8b. Attach a statement to your paper return explaining the difference and print ‘See attached’ next to line 8b.”
How to document home equity loan use for tax deductions
Keeping good records might not be the most exciting part of using a home equity loan, but it can make a big difference when tax season rolls around. Since the IRS looks closely at how the borrowed money was actually used, having clear documentation helps you prove that the interest qualifies for a deduction. It also makes things much easier if you ever need to back up your claim or sort out any questions later.
Here’s what you should keep on file:
- Loan agreements showing the terms and purpose of the home equity loan or HELOC
- Contractor invoices that show exactly what work was done and how much was paid
- Building permits for any approved renovations or structural work
- Receipts for materials and improvements that qualify under IRS rules
- Mortgage interest statements (Form 1098) from your lender showing interest paid during the year
As a general rule, it’s best to keep all related documents organized in one place, either a digital folder or a physical file, and hold onto them for several years in case you ever need to reference them.
Get More from Your Home Equity with Expert Guidance
Don’t leave your equity on the table when it’s time to sell. A skilled real estate agent can help you position your home to get the strongest possible return.
Know your home’s value and deduct what’s allowed
Home equity loans and HELOCs can be a useful way to tap into your home’s value, but the tax treatment depends heavily on how the money is used. In most cases, the interest is only deductible when the funds go toward buying, building, or substantially improving the home tied to the loan. That’s why it’s important to look beyond just the borrowing itself and understand the rules behind the deduction.
While many homeowners don’t run into the more complex IRS limits, the details still matter if you want to avoid surprises at tax time. Knowing how home equity debt is classified can help you make smarter decisions about when and how to use it. If you’re buying or selling a home or simply looking for ways to make the most of your home equity, partnering with a trusted real estate agent can help you navigate your options with confidence.
Header Image Source: (paulbr75/ Pixabay)
English (US) · 