Home equity loan interest is deductible only if you use the money for home improvements

The tax deduction for home equity loan interest depends entirely on what you do with the borrowed money. If you take out a home equity loan and use those funds to build a deck, renovate a kitchen, or repair the roof, the interest you pay is deductible on your federal tax return. If you use the same loan to pay off credit cards, buy a car, or cover medical bills, the interest is not deductible.

This rule comes from Section 163(h) of the Internal Revenue Code. The IRS distinguishes between debt used to improve your home (deductible) and debt used for other purposes (not deductible), regardless of whether the loan is secured by your house. A home equity line of credit works the same way: the interest is deductible only on the portion you borrowed and spent on home improvements.

You must itemize deductions on your tax return to claim this interest. Most taxpayers take the standard deduction instead, which means they do not report home equity loan interest at all. You will need to compare itemizing against the standard deduction to see which gives you a larger total deduction.

Key Takeaways

  • Home equity loan interest is deductible only when you use the borrowed money for home improvements, repairs, or construction on the property that secures the loan.
  • Using a home equity loan to pay off other debts, medical expenses, or personal purchases makes the interest non-deductible, even though the loan is secured by your house.
  • You must itemize deductions on Schedule A to claim home equity loan interest; most taxpayers use the standard deduction instead and receive no tax benefit.
  • The IRS requires you to track how you spent the loan proceeds, so keep receipts and documentation showing the money went to home improvements.
  • A home equity line of credit follows the same rule: only interest on the amount you drew and spent on home improvements is deductible.

How the IRS determines whether your interest is deductible

The IRS does not care what your lender calls the loan. What matters is the actual use of the money. If you borrow $50,000 against your home equity and deposit it into your checking account, then write checks from that account for a kitchen remodel, the interest is deductible. If you write checks from that same account for a vacation and a car payment, the interest on the portion used for those purposes is not deductible.

You are responsible for tracking and documenting how you spent the proceeds. The IRS does not require you to submit receipts with your tax return, but you must be able to produce them if audited. Keep invoices from contractors, receipts from building supply stores, and any other documentation showing the money went to home improvements. If you cannot demonstrate that you spent the loan on your home, the IRS will disallow the deduction.

The home must be your primary residence or a second home. Investment properties, rental homes, and vacation homes you do not personally use do not may have access to. The loan must also be secured by the home itself—meaning the lender has a lien on the property. An unsecured personal loan, even if you use it for home improvements, does not produce a deductible interest expense.

Income limits and the $750,000 debt cap

There is a ceiling on how much home equity debt can produce deductible interest. As of the 2017 tax year, you can deduct interest only on home equity debt up to $750,000 (or $375,000 if you are married filing separately). This limit applies to the combined total of your mortgage and home equity loans on all homes you own.

For example, if you have a $400,000 mortgage and a $200,000 home equity loan, both secured by the same house, your total home debt is $600,000. All the interest on both loans is deductible because you are under the $750,000 cap. If you had a $500,000 mortgage and a $300,000 home equity loan, your total is $800,000. Only the interest on the first $750,000 would be deductible; interest on the remaining $50,000 would not be.

This limit has been in place since 2018 and is scheduled to remain through 2025 under current tax law. After 2025, the limit is set to revert to $1,000,000 unless Congress extends the current rule. Check the year you are filing for to confirm which limit applies.

Itemizing versus the standard deduction

Even if your home equity loan interest is deductible under the rules above, you only benefit from the deduction if you itemize. The standard deduction for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. If your total itemized deductions—including home equity loan interest, mortgage interest, property taxes, and charitable donations—do not exceed the standard deduction, you receive no tax benefit from the home equity loan interest.

Many homeowners find that the standard deduction is larger than their itemized deductions, especially after the 2017 tax changes. You should calculate both to see which is larger in your situation. If you are close to the standard deduction threshold, the home equity loan interest might push you over it and create a tax benefit. If you are far below it, the interest deduction will not reduce your taxes.

Mortgage interest is also deductible only if you itemize, and it follows the same $750,000 debt limit. Some taxpayers bundle home equity loan interest with mortgage interest and other deductions to reach the itemization threshold. A tax professional can help you model both scenarios for your specific income and deductions.

What counts as a home improvement for tax purposes

The IRS has a specific definition of home improvement: work that adds value to your home, prolongs its useful life, or adapts it to a new use. Repairs and maintenance do not count. Replacing a broken window is a repair; replacing all the windows with new energy-efficient ones is an improvement. Patching a roof is maintenance; replacing the entire roof is an improvement.

Common improvements that may have access to include additions (decks, rooms, garages), major replacements (roof, siding, windows, HVAC system), kitchen and bathroom remodels, and permanent fixtures (built-in appliances, flooring). Painting, landscaping, and furniture do not count. If you are uncertain whether a specific project qualifies, the IRS publication 587 (Business Use of Your Home) provides examples, though it is written for rental properties. A tax professional can advise on borderline cases.

The improvement must be to the home that secures the loan. If you borrow against your primary residence to improve a rental property or investment real estate, the interest is not deductible under this rule. The property being improved and the property securing the loan must be the same.

Home equity lines of credit and variable interest rates

A home equity line of credit (HELOC) works the same way as a home equity loan for tax purposes, but the mechanics are different. With a HELOC, you have a credit limit and draw money as needed. You pay interest only on the amount you have actually borrowed, not on the full credit limit. This means your deductible interest changes each year based on how much you drew and how much of that you spent on home improvements.

If you have a $100,000 HELOC but only drew $40,000 in a given year, you pay interest only on the $40,000. If you spent all $40,000 on a kitchen remodel, all the interest is deductible. If you spent $25,000 on the remodel and $15,000 on other purposes, only the interest on the $25,000 is deductible. You must track the draws and their uses separately for each tax year.

HELOCs often have variable interest rates that change with market conditions. Your deductible interest amount stays the same (based on how much you spent on improvements), but the rate you pay on that amount fluctuates. Keep records of your interest payments each year, because the amount you can deduct will vary.

Frequently Asked Questions

Can I deduct home equity loan interest if I used the money to pay off credit card debt?

No. The IRS looks at how you spent the money, not what the loan is called. If you borrowed against your home to pay off credit cards, the interest is not deductible, even though the loan is secured by your house. Only interest on the portion of the loan used for home improvements is deductible.

What if I used part of my home equity loan for improvements and part for other things?

You can deduct interest only on the portion you spent on home improvements. If you borrowed $50,000 and spent $30,000 on a roof replacement and $20,000 on a car, you calculate the deductible interest by multiplying your total interest by the fraction that went to improvements ($30,000 ÷ $50,000 = 60%). Only 60% of your interest is deductible.

Do I need to report the home improvement to the IRS when I take out the loan?

No. You do not report the loan itself. You only report the deductible interest on your tax return if you itemize deductions. Keep documentation of the improvements in case you are audited, but you do not file anything with the loan application or when you close the loan.

Is the interest deductible if the home equity loan is on a rental property I own?

No. Home equity loan interest is deductible only on your primary residence or a second home you personally use. Rental properties and investment real estate follow different tax rules. Interest on loans secured by rental property may be deductible as a business expense, but not under the home equity loan rules.

What happens to my deduction if I refinance my home equity loan?

The deductibility does not change. If you refinanced a home equity loan that was used for improvements, the interest on the new loan is still deductible, as long as you are under the $750,000 debt limit and you itemize. Refinancing does not alter the original use of the money or your ability to deduct the interest.