Are Home Equity Loans Deductible?

Home equity loan interest can be deductible when you itemize and the money paid for buying, building, or substantially improving the home that secures the loan.

A home equity loan can feel like a simple move: borrow against your house, get a lump sum, pay it back over time. The tax part is where people get tripped up.

Here’s the clean rule that drives almost every outcome: the IRS cares what you used the money for and which home secures the debt. If both line up with the IRS rules, the interest may qualify as home mortgage interest. If they don’t, that interest usually stays non-deductible, even if the lender calls it “home equity.”

This article walks you through the real-world decisions that change the answer, the paperwork that keeps you safe if the IRS asks questions, and the common “I thought it counted” mistakes that cost people a deduction.

Are Home Equity Loans Deductible? When Interest Counts

People ask this question as if the loan itself is either deductible or not. Taxes don’t work that way here. The loan principal isn’t a deduction. The interest might be.

Interest tied to a qualified residence can be deductible when the loan is secured by your main home or second home, and the funds were used to buy, build, or substantially improve the home that secures the loan. The IRS spells this out in IRS Publication 936 (Home Mortgage Interest Deduction).

If the money went to other goals—paying off cards, covering tuition, taking a trip, starting a business—interest tied to that use usually won’t qualify as home mortgage interest, even if your house backs the loan.

One more gatekeeper: you must itemize deductions on Schedule A to claim mortgage interest. If you take the standard deduction, you don’t separately deduct this interest. The IRS notes this itemizing flow in the Instructions for Schedule A (Form 1040).

Home Equity Loan Basics That Matter For Taxes

Start with what a home equity loan is. It’s a lump-sum loan that uses your home as collateral. You borrow against the equity you’ve built up, then repay with interest on a set schedule. The CFPB’s plain-language breakdown is here: Consumer Financial Protection Bureau: What Is A Home Equity Loan?

From a tax angle, three details matter more than the marketing name:

• What property secures the debt. The secured home must be your main home or a second home that meets IRS rules for a qualified residence.
• How the money was used. Buying, building, or substantially improving the same home that secures the loan is the usual path to deductible interest.
• How you report deductions. Itemizing is required to claim mortgage interest on Schedule A.

A HELOC works differently than a home equity loan, yet the same tax logic often applies: secured debt plus qualifying use. The shopping and risk side is worth taking seriously, since your home is on the line. The FTC’s overview is a solid reality check: FTC: Home Equity Loans And Home Equity Lines Of Credit.

What “Buy, Build, Or Substantially Improve” Looks Like In Real Life

People get stuck on the phrase “substantially improve.” It doesn’t mean “I spent a lot.” It means the work adds to the home’s value, extends its useful life, or adapts it to new uses. Think projects that change the structure, systems, or long-term function.

Projects that often fit the “substantially improve” idea:

• Adding a room, finishing a basement, building a deck
• Replacing the roof, rewiring the home, major plumbing work
• Kitchen remodels that replace cabinets, counters, layout, or wiring
• Replacing HVAC, adding central air, upgrading insulation across the home
• Accessibility renovations tied to mobility needs, when they materially change the home

Projects that often don’t rise to that level:

• Routine repairs: fixing a leak, repainting a room, patching drywall
• Maintenance work: cleaning gutters, servicing HVAC, replacing a broken window pane
• Decor-only updates: swapping curtains, buying furniture, adding rugs

Repairs can be part of a larger improvement. Say you tear out walls for a remodel and also fix damaged wiring you found. That repair is part of the improvement job. Your records are what tell that story.

How The Secured-By Rule Trips People Up

There’s a detail many people miss: the IRS ties deductible interest to improving the same home that secures the loan. A common misstep looks like this:

• You take a home equity loan secured by your primary home.
• You use the money to renovate a rental, a cabin, or a different property.
• You assume the interest is deductible as mortgage interest.

The secured-by rule can break the deduction in that scenario. You might still have a tax angle tied to rental rules or business rules, depending on facts, but it’s not the clean Schedule A home mortgage interest deduction people expect. Publication 936 is the place to start for the mortgage-interest side of the rule.

Table: Common Uses Of Home Equity Money And Tax Treatment

The table below is a practical way to sanity-check your use of funds before tax time. It focuses on the home mortgage interest path (Schedule A), not business or rental tax rules.

How The Money Was Used	Interest Often Qualifies On Schedule A?	What You Should Keep
New roof on the same home that secures the loan	Often yes	Contract, invoice, proof of payment, permit if issued
Kitchen remodel that changes cabinets, counters, wiring	Often yes	Detailed receipts, contractor scope, before/after plan notes
Adding a bathroom or expanding living space	Often yes	Permits, inspection records, invoices, payment proof
Replacing a failed water heater	Depends on scope	Receipt plus notes on whether part of a larger remodel
Debt consolidation (credit cards, personal loans)	Often no	Loan statement plus allocation notes (shows non-qualifying use)
Paying tuition or medical bills	Often no	Loan documents and bank trail (use tracking)
Buying a car, RV, or boat	Often no	Purchase contract and bank trail
Renovating a different property than the one securing the loan	Often no (for Schedule A)	Clear use-of-funds log, property notes, separate account trail
Mixed spending (part remodel, part personal)	Split by use	Allocation spreadsheet, receipts, bank statements, draw log

Itemizing: The Step People Skip

Even if your interest qualifies, you only claim it when you itemize. That means you list deductions on Schedule A instead of taking the standard deduction.

This is the simple decision point:

• If your total itemized deductions are higher than your standard deduction, itemizing may save money.
• If not, the home equity interest might not change your tax bill at all, even when it qualifies.

The Schedule A instructions are the map for where mortgage interest goes and when limitations apply.

How To Track Your Use Of Funds Without Getting Lost

When your home equity loan funds go to a single big improvement paid in one shot, recordkeeping is easy. Trouble starts when money moves through multiple accounts or pays a mix of projects and personal spending.

Here are record habits that keep the story clear:

• Use a dedicated account. Deposit the loan proceeds into an account used only for the home project. Pay project bills from that account.
• Save a “job file.” Keep contracts, invoices, permits, and proof of payment in one folder. Digital scans are fine if they’re readable.
• Write one-sentence notes on receipts. “New electrical panel for kitchen remodel” beats a bare store receipt.
• Track draws if you used a HELOC. Keep a simple log: date, amount, payee, project description.
• Split mixed spending on purpose. If part of the loan went to a qualifying remodel and part went elsewhere, label each payment and keep totals.

This isn’t busywork. Your documentation is what connects the interest you paid to the qualifying work the IRS requires.

Table: A Clean Filing Checklist For Home Equity Interest

Use this checklist as you pull documents together. It’s built for a normal household return with itemized deductions.

Task	What To Gather	Why It Helps
Confirm the loan is secured by a qualified residence	Closing docs, deed of trust or mortgage, property address	Shows which home backs the debt
Confirm the funds were used for qualifying work	Contracts, invoices, receipts, permits	Connects spending to buy/build/substantial improvement
Collect lender reporting	Form 1098 (if issued), annual interest statement	Summarizes interest paid for the year
Check if your mortgage interest is limited	Loan balances, origination dates, Pub. 936 notes	Helps apply IRS limits when they apply
Decide between standard deduction and itemizing	Projected itemized totals vs standard deduction	Shows whether the deduction changes your tax bill
Fill out Schedule A correctly	Schedule A, Form 1040, instructions	Puts deductible interest in the right place
Keep your records after filing	Digital folder with all proof	Makes future questions easy to answer

Edge Cases That Change The Answer

Mixed-use loans

If you used part of the money for a qualifying remodel and part for personal spending, the interest isn’t all-or-nothing. The clean approach is to allocate by use and keep a tight paper trail. Publication 936 covers how deductibility ties to use of proceeds.

Second homes

A second home can count as a qualified residence under IRS rules, which opens the door to deductible interest in some cases. The same use-of-funds logic still applies. Publication 936 is again the main source for the mortgage interest framework.

Refinancing and rolled-in balances

Some homeowners refinance and roll a prior home equity balance into a new mortgage. Tax treatment can shift based on how the debt is structured, the dates, and what the money paid for. Use the Schedule A instructions as your filing guide and Publication 936 as the rulebook for mortgage interest details.

Home equity products that are not loans

There are arrangements in the market that are marketed as “home equity” deals but aren’t traditional loans. The tax treatment can differ because the structure differs. If you’re not sure what you signed, start by reading your agreement’s sections on repayment, interest, and collateral, then compare the basics to the CFPB’s description of a standard home equity loan.

Mistakes That Cost People The Deduction

• Assuming “home equity” automatically means deductible. Use of funds drives the result.
• Paying project bills from a messy account. A clean trail saves headaches.
• Mixing repairs with improvements without notes. Notes and scopes make the spending clear.
• Taking the standard deduction and still expecting a separate interest write-off. Mortgage interest sits inside itemized deductions.
• Using the loan on a different property than the one securing the debt. That mismatch is a common deduction killer for Schedule A.

A Practical Way To Answer The Question For Your Own Loan

If you want a fast, accurate self-check, run these three questions in order:

1. Did I itemize deductions on Schedule A for the tax year? If not, the home mortgage interest deduction won’t be claimed.
2. Is the debt secured by my main home or second home? If not, it won’t fit the home mortgage interest bucket.
3. Did the money pay for buying, building, or substantially improving the same home securing the loan? If yes, the interest often qualifies under the IRS mortgage interest rules.

If you can answer “yes” to all three, you’re in the zone where the deduction often applies. Then your job is paperwork: keep a clean trail and follow the IRS instructions for reporting.