Is Home Equity Loan Interest Tax Deductible? (Simply Put)
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Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
In the past four years, home values in the U.S. have surged by 47%. As a result, homeowners are collectively sitting on close to $33 trillion in home equity — and many are taking advantage of this windfall through equity-backed loans. This begs the question: Is home equity loan interest tax deductible?
Like so many things touched by the IRS, the agency’s answer can sound complex or even ambiguous. In this brief post, we simplify and clarify the key rules. It all starts with an easier question: How are you spending the loan funds?
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Is home equity loan interest tax deductible?
Simply put, taxpayers can deduct the interest on a home equity loan or home equity line of credit (HELOC) in most cases if they use the money to renovate or improve the property that backs the equity loan.
There are additional rules and limitations on large or combined equity-backed loan amounts. But since the average equity loan taken out by U.S. homeowners is around $100,000, and the average HELOC balance is about $42,000, most Americans won’t need to claw through the “limits for deductions on all residential debt” spelled out in IRS Publication 936.
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.”
In IRS lingo, this qualified interest you pay on the borrowed funds is classified as home acquisition debt. These rules apply to money borrowed for tax years 2018 through 2025. Later in this post, we’ll provide a concise section addressing money borrowed before 2018 and after 2025. (Yes, the IRS has a tax code window for this, but we’ll simplify that, too.)
Does your home equity loan qualify?
Under this “buy, build, or substantially improve” test, you could potentially deduct home equity loan or HELOC interest if the borrowed money is used for the following:
- 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 debt consolidation, 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 home equity line of credit (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?
If you are planning ahead for tax year 2026 and beyond, for home equity loans or lines of credit secured by your main home or second home, the interest you pay may be deductible regardless of how you use the money.
For example, if you use a home equity loan or a line of credit to pay off credit card debts, you may be able to deduct the interest paid on those borrowed funds. They will still be subject to certain dollar limitations in 2026, but the IRS will return to more flexible qualification guidelines that existed before 2018.
This seven-year rule window has to do with expiration dates contained in the 2017 Tax Cuts and Jobs Act (TCJA). However, these rules could change depending on how Congress decides to handle the expiring tax code.
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). Your home equity loan or HELOC lender should send you a Form 1098 that 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.”
Whew, that’s a lot! This is why we led this section by explaining that your tax service or online tax software will guide you on how to report and claim your home mortgage Interest deductions. You have enough forms, lines, schedules, and boxes in your life. Take advantage of tax professionals or software innovations that make it easier.
Know your home’s value and deduct what’s allowed
That’s it — our simple guide to answering the question, “Is home equity loan interest tax deductible?” We hope this post has been helpful. We should point out that this article is for educational purposes and is not intended to be construed as financial or tax advice. HomeLight always encourages our readers to reach out to experienced advisors.
If you need advice from a top-rated real estate professional, HomeLight partners with more than 30,000 of the highest-performing real estate agents in the country. Our free Agent Match platform analyzes over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs.
So whether you are buying or selling or just looking to consult with a seasoned expert about what renovations or upgrades will add the most value to your home, we’ll be happy to connect you with a top agent in your market today.
If you’re curious about what your home is worth today, HomeLight’s Home Value Estimator can provide you with a ballpark value estimate in less than two minutes. Our online tool uses information from multiple sources to create a preliminary home value estimate based on current market trends.
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- "Tax Cuts and Jobs Act of 2017 (TCJA)", Legal Information Institute (May 2022)
- "Average HELOC Balances up 2.7% in 2023", Experian (March 2024)
- "Americans Are Sitting on Tens of Trillions of Dollars of Home Equity — Here’s Where Homeowners Are Offered the Largest and Smallest Home Equity Loans", LendingTree (August 2023)
- "Why Home Prices In The U.S. Have Surged By Nearly 50% Since 2020", Yahoo! (May 2024)
- "Trump-era tax cuts set to expire after 2025 — here’s what you need to know", CNBC (May 2024)
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