Home equity loan interest can be deductible when you itemize and use the money to buy, build, or substantially improve the home that secures the loan.
A home equity loan can be a clean way to fund major work on a house. Tax time brings the big question: does the interest lower your taxable income?
The IRS does not give a blanket yes. It cares about three things: what the money paid for, which home secures the debt, and whether you itemize deductions.
What The IRS Treats As Deductible Home Interest
The core rule is stated plainly in Publication 936, Home Mortgage Interest Deduction: interest on home equity loans and lines of credit is deductible only when the borrowed funds are used to buy, build, or substantially improve the home that secures the loan.
If the spending and the collateral match, you may have a deduction. If the cash went to personal spending, the interest usually stays non-deductible.
Itemizing Is The Gatekeeper
This deduction lives on Schedule A. If you take the standard deduction, you won’t claim home mortgage interest separately. Start by checking last year’s return and seeing whether you itemized.
The Loan Must Be Secured By A Qualified Residence
The loan has to be secured by a qualified residence: your main home or second home. “Secured” means the lender has a legal claim on that property if you don’t repay.
Use-Of-Funds Is Where Most People Slip
Many borrowers think “secured by my home” equals “deductible.” The IRS asks what the money paid for. The purpose has to be tied to buying, building, or making a substantial improvement to the home that secures the loan.
Home equity loan interest tax deductions in plain terms
Think in terms of projects that become part of the property, raise value, or extend useful life.
Projects That Often Fit The Rule
- Room additions, finished basements, or major layout changes
- Roof, windows, siding, or other exterior replacements
- Kitchen or bath remodels that replace fixtures and systems
- Major system work like HVAC replacement or full rewiring
Spending That Usually Does Not Fit The Rule
- Paying off credit cards or other personal debt
- Tuition, travel, weddings, or everyday bills
- Routine maintenance and minor repairs
Mixed-Use Borrowing Needs Clear Tracing
If one loan funded both a remodel and personal spending, the interest can become a split calculation. You may be able to deduct only the share tied to qualifying costs, and you’ll want records that trace payments.
Debt Limits And Other Rules That Can Shrink The Deduction
Even when the spending qualifies, the IRS may cap how much interest you can deduct based on the amount of eligible mortgage debt you carry. Publication 936 explains the debt categories and provides worksheets for cases where balances exceed the limit.
Tax law can change. As of February 2026, the IRS Publication 936 page is labeled for 2025 and describes rules that applied through that tax year. When you file, match your reading to the tax year you’re reporting.
How To Make Your Deduction Easy To Defend
The goal is simple: show that the loan was secured by the home, and show that the proceeds paid for qualifying work on that same home.
Documents Worth Keeping
- Loan paperwork showing the property that secures the debt
- Contracts, invoices, and receipts for the work
- Bank records that show you paid those invoices
A “Before You File” Self-Check
- Is the loan secured by your main home or second home?
- Did the money go into buying, building, or improving that same home?
- Are you itemizing deductions on Schedule A?
- Are your combined mortgage balances within the IRS limit, or have you run the worksheet?
For the IRS’s short summary of the rule, read its home mortgage interest FAQ alongside Publication 936.
Special Situations That Can Change The Result
Many returns fit the simple pattern: one home, one loan, one remodel. A few common twists can change how the interest is treated or where it is reported.
Second homes And Vacant Properties
A second home can be a qualified residence, so a loan secured by that second home can still fall under the home mortgage interest rules when the funds improve that same property. If the property is not used as a home at all, or if it is treated as a rental for tax purposes, the reporting can shift.
Rentals, Partial Rentals, And Home Offices
If you rent out part of your home, or if you use part of the home for business, the interest can end up split between personal and rental or business use. That split is separate from the “substantial improvement” test. It is about how the property is used during the year. Publication 936 flags these mixed-use situations and points you to the worksheets and instructions that apply.
What Counts As A “Substantial Improvement” In Practice
The IRS wording can feel vague until you map it to real work. A new roof, an added bathroom, or a full kitchen rebuild changes the property. Replacing a broken window pane or patching a small leak is a repair. If you’re on the fence, ask a simple question: when the work is done, is the home materially better, or did it just get brought back to its prior state?
Keep a short project note with your receipts. A one-line description like “replace roof shingles and flashing” or “remove and rebuild kitchen cabinets and plumbing” makes your file easier to read a year later.
Closing Costs, Points, And Prepaid Interest
Home equity loans sometimes come with points or prepaid interest. The tax treatment of those costs can differ from regular monthly interest, and timing can matter. The safest move is to keep the closing disclosure and enter the numbers exactly as your tax software asks, then use the IRS worksheets when the prompts go beyond a basic Form 1098 entry.
Table: Eligibility Scenarios And What To Do Next
The table below turns the rule into everyday scenarios.
| Scenario | Likely treatment | Best next step |
|---|---|---|
| Loan secured by main home, funds used for a kitchen remodel on that home | Often deductible if you itemize | Save invoices, receipts, and proof of payment |
| Loan secured by main home, funds used for roof replacement on that home | Often deductible if you itemize | Keep contract and payment records |
| Loan secured by main home, funds used to pay credit cards | Usually not deductible | Plan for the full after-tax interest cost |
| One loan used for both remodel and tuition | Part may be deductible | Trace each payment and split interest by use |
| Loan secured by home A, improvements done on home B | Usually not deductible | Match the project to the collateral property |
| You take the standard deduction | No Schedule A benefit | Run an itemized vs. standard comparison |
| Total eligible mortgage debt exceeds the IRS limit | Partial deduction possible | Use Publication 936 worksheets |
| HELOC draws over time for a remodel on the secured home | Often deductible if you itemize | Track each draw to each project payment |
How It Shows Up On Your Return
Many borrowers receive Form 1098, Mortgage Interest Statement. The IRS explains what lenders report in the Form 1098 instructions. The form helps you gather numbers, yet it does not prove the interest is deductible. The “secured home” rule and the “use-of-funds” rule still need to fit.
Two Common Filing Paths
If your spending is cleanly tied to qualifying work and your balances are under the limit, filing is often straightforward: you itemize, enter the mortgage interest, and keep your project file with your tax records.
If you have mixed-use borrowing or high balances, expect extra steps. You may need to allocate interest, then enter only the deductible share using the Publication 936 worksheets.
Table: Quick Checks Before You Borrow Against Equity
This second table is a pre-loan gut check. It pairs tax eligibility with borrowing risk.
| Question | Why it matters | Action |
|---|---|---|
| Will the money go into the same home that secures the loan? | Deductibility hinges on this linkage | Write a project budget before you sign |
| Will you itemize this year? | No itemizing, no Schedule A benefit | Compare last year’s itemized total to the standard deduction |
| Can you keep improvement spending separate from personal spending? | Mixed use often forces a split calculation | Use a separate account for the loan proceeds |
| Is the rate fixed or variable? | Variable rates can raise payments | Ask the lender for a worst-case payment example |
| Are there fees for draws, annual maintenance, or early closure? | Fees change the true cost | List fees next to the rate when you compare offers |
| Do you understand how a HELOC draw period works? | Payments can jump when repayment starts | Read the CFPB HELOC booklet before you commit |
Final Notes For Tax Time
If your home equity loan paid for meaningful work on the home that secures the loan, and you itemize, the interest may be deductible. If the loan funded personal spending, the interest is usually not deductible. If one loan funded both, you may be able to deduct only the improvement share if you can trace it.
To make filing smooth, keep one folder with loan documents, project invoices, and proof of payment. When those pieces line up, claiming the deduction is far less stressful.
References & Sources
- Internal Revenue Service (IRS).“Publication 936, Home Mortgage Interest Deduction.”Primary IRS guidance on when home equity loan or HELOC interest can qualify as deductible mortgage interest and how debt limits work.
- Internal Revenue Service (IRS).“Real estate taxes, mortgage interest, points, other property expenses (FAQ).”IRS FAQ summary on itemized deductions tied to mortgage interest and how home equity borrowing fits the rule.
- Internal Revenue Service (IRS).“Instructions for Form 1098 (Mortgage Interest Statement).”Explains what lenders report on Form 1098 and how the reported interest documents your tax records.
- Consumer Financial Protection Bureau (CFPB).“What You Should Know About Home Equity Lines of Credit (HELOCs).”Government booklet on HELOC structure, rate types, draw periods, and repayment terms.