Many homeowners turn to HELOCs and home equity loans to fund big projects. And with interest rates often lower than credit cards or personal loans, it’s easy to see the appeal. But one question comes up again and again:
Can you deduct the interest on your taxes?
The answer: It depends on how you use the funds.
But thanks to recent changes in the tax code, many people are still working with outdated information and sharing common misconceptions. So, let’s clear things up.
A Quick Refresher on HELOCs and Home Equity Loans
A HELOC (Home Equity Line of Credit) is a revolving line of credit that allows you to borrow against your home equity as needed, typically with a variable interest rate.
A Home Equity Loan (sometimes called a second mortgage) is a lump-sum loan that almost always carries a fixed rate and term, and is also secured by your home equity.
Both are considered mortgage debt by the IRS, but that doesn’t automatically make the interest deductible.
What the IRS Says About Deducting Interest
Under the Tax Cuts and Jobs Act of 2017, the rules for deducting mortgage interest changed significantly. As of 2018 and beyond:
Interest on home equity loans and HELOCs is only tax-deductible if the funds are used to “buy, build, or substantially improve” the home that secures the loan. – IRS Publication 936: Home Mortgage Interest Deduction
This means:
What’s deductible:
Renovating your kitchen or bathroom
Adding a new roof or home office
Finishing a basement or building an addition
What’s NOT deductible:
Any of the above on a second property, assuming the loan in question is secured by your first property
Paying off credit cards or student loans
Buying a car
Funding a vacation or business
Using a HELOC to buy a second property
Common Misconceptions (and Why They’re Dangerous)
“All mortgage interest is tax-deductible.” Not anymore, and especially not when used for non-home purposes.
“I used my HELOC to consolidate debt, so I’ll deduct the interest.” Unless you used the loan to improve your home, the interest is not deductible.
“If I use the HELOC to invest in a rental, it’s still real estate, right?” Wrong. In order for interest to be tax-deductible, the loan must be secured by the home being improved. Using your home’s equity to buy or improve another property doesn’t qualify under current rules.
Misunderstanding these details could mean missing out on a deduction you expected — or worse, claiming one you’re not entitled to and facing IRS scrutiny.
What Homeowners Should Do
Track how you use the funds. Keep detailed records (receipts, contractor invoices, etc.) to prove that the money was used for qualified improvements.
Know the limits. The total mortgage debt you can deduct interest on is capped at $750,000 (or $1 million for mortgages taken out before Dec. 16, 2017).
Consult a tax professional. Everyone’s situation is different — especially if you’re juggling a first mortgage, second mortgage, and/or a mixed-use HELOC.
So, When Is HELOC or Home Equity Loan Interest Tax-Deductible?
Interest on HELOCs and home equity loans can be tax-deductible — but only when the loan is used for qualified home improvements on the property securing the debt.
Anything else, and you’re likely out of bounds under current IRS rules. Before counting on a tax break, be sure to understand what qualifies, and what doesn’t. Getting it wrong could cost you more than just the deduction.
Disclaimer: This content is for informational and educational purposes only and does not constitute financial, legal, or lending advice.
About the Author
Unison
We're the pioneers of equity sharing, offering innovative ways for you to gain access to the equity in your home. For more than a decade, we have helped over 12,000 homeowners to pursue their financial goals, from home renovations to debt consolidation, retirement savings, and more.
