Is HELOC Interest Tax Deductible? IRS Rules and Limits

Tapping into your home’s equity can feel like a smart financial move, especially when interest rates on other types of debt are higher. However, when tax season rolls around, many homeowners are surprised to learn that HELOC interest isn’t always deductible. Knowing these rules can help you avoid incorrect assumptions and plan borrowing more carefully.

A financial advisor can explain how the HELOC interest deduction rules apply to your situation and how borrowing may affect your overall tax plan.

Is HELOC Interest Tax Deductible?

A home equity line of credit (HELOC) can be a flexible way to borrow against your home, but the tax benefits aren’t as straightforward as they once were. Whether HELOC interest is tax-deductible depends largely on how you use the funds and when you take out the loan. Understanding the current IRS rules can help you avoid incorrect assumptions at tax time.

Under current IRS guidelines, HELOC interest is generally deductible only if the borrowed funds are used to buy, build or substantially improve the home that secures the loan ¹ . Using a HELOC to pay off credit cards, cover living expenses or fund a vacation typically does not qualify for the deduction. The purpose of the loan, not the type of loan, is what matters most.

Before 2018, interest on home equity debt was often deductible, regardless of how the money was used. The Tax Cuts and Jobs Act eliminated that broad deduction and tightened the requirements through at least 2025 ² . As a result, many homeowners who could previously deduct HELOC interest may no longer be eligible.

Rules for Deducting HELOC Interest

The IRS allows HELOC interest deductions only when you use the money to buy, build or substantially improve the home that secures the loan. Projects for home improvement, such as renovations, additions or major system upgrades, typically qualify. Using the funds for unrelated expenses, even if financially prudent, does not meet the requirement.

The amount of interest you can deduct depends on your combined mortgage-related debt. For most taxpayers, interest is deductible on up to $750,000 of qualified debt if married filing jointly, or $375,000 if married filing separately ³ . This limit includes your primary mortgage, home equity loan and HELOC combined.

Claiming a HELOC interest deduction requires itemizing on Schedule A rather than taking the standard deduction. Because the standard deduction is relatively high, some homeowners may find that itemizing provides no additional tax benefit. Running the numbers can help determine whether the deduction is actually worthwhile.

Only interest on debt secured by your home qualifies for the mortgage interest deduction. If a HELOC is unsecured or refinanced in a way that removes the lien, the interest generally becomes nondeductible. The property itself must serve as collateral for the loan.

You should prepare documentation showing how you use HELOC funds in case the IRS requests it. Keeping receipts, contracts and loan statements can help substantiate that the expenses qualify. Clear records are especially important if you use the line of credit over multiple years.

Other Tax Benefits of a HELOC or Home Equity Loan

When you use HELOC or home equity loan funds to substantially improve your home, the interest may be deductible under IRS rules. These improvements can also increase your home’s cost basis, which may reduce capital gains taxes if you sell the property later. While the benefit isn’t immediate, it can factor into longer-term tax planning.

Unlike many other borrowing types, a HELOC offers flexibility in how and when you can access funds. Even when interest isn’t deductible, rates are often lower than those on personal loans or credit cards. This can indirectly support tax efficiency by reducing overall interest costs.

Using a HELOC or home equity loan does not affect your ability to claim the home sale capital gains exclusion. As long as you meet ownership and residency requirements, you may still exclude up to $250,000 in gains as a single filer or $500,000 if married filing jointly. This can be reassuring for homeowners planning future moves.

Some states follow federal guidelines for deducting home equity interest, while others have their own rules. Depending on where you live, state tax treatment could provide additional benefits or limitations.

Checking both federal and state rules can give you a clearer picture of your total tax exposure.

How to Deduct HELOC Interest on Taxes

First, verify eligibility upfront to help prevent issues later. Before claiming any deduction, it is important to ensure you use the HELOC funds to buy, build or substantially improve the home that secures the loan. Interest you use for other purposes generally does not qualify, even if the loan itself is secured by your home.

To deduct HELOC interest, you must itemize deductions instead of taking the standard deduction. Report mortgage and qualifying home equity interest on Schedule A of your federal tax return. If your total itemized deductions don’t exceed the standard deduction, claiming the interest may not provide a tax benefit.

Your lender typically issues Form 1098, a mortgage interest statement showing the amount of mortgage and HELOC interest you paid during the year. This form helps you accurately report deductible interest on your tax return. Reviewing it carefully is important, especially if you have multiple loans tied to your home.

Bottom Line

The bottom line is that HELOC interest can still be tax-deductible, but only if you follow strict IRS rules about how to use the funds and claim the deduction. Debt limits, itemizing requirements and careful recordkeeping all play a role in determining whether you’ll actually see a tax benefit.

Financial Planning Tips

• A financial advisor can help you evaluate whether a HELOC makes sense for your situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to figure out how much you can spend on a home, SmartAsset’s affordability calculator can help you estimate how much house you can afford based on several key inputs.

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