Are Home Equity Loans Tax-Deductible? + FAQs

Yes, interest on a home equity loan can be tax deductible – but only if you follow strict IRS rules (and a big post-2018 change limits who qualifies).

U.S. homeowners now hold over $30 trillion in home equity, yet only about 10% of taxpayers itemize deductions to claim tax breaks like mortgage interest. The result? Many homeowners are confused about whether tapping their equity will still save them on taxes. Misunderstanding the rules can mean missing out on valuable tax savings – or even getting in trouble with the IRS.

• ✅ Eligible uses = tax break: Interest is deductible if your home equity loan (or HELOC) funds buying, building, or substantially improving your home (e.g. a kitchen remodel).

• 🚫 Personal uses = no deduction: Interest is not deductible if you spent the loan on personal expenses like debt consolidation, medical bills, or college tuition under current law.

• 📜 2018–2025 law change: The Tax Cuts and Jobs Act (TCJA) tightened deduction rules – but in 2026, the old home equity interest deductions (up to $100,000 for any use) are set to return unless new laws are passed.

• 💡 Pro tips: You must itemize deductions (forgo the standard deduction) to claim this, and keep records showing how you used your loan. Proper planning can maximize your tax benefits and avoid IRS pitfalls.

In this comprehensive guide, we’ll explain exactly when a home equity loan’s interest is deductible, how federal vs. state laws differ, and strategies to make the most of this tax benefit (with real examples, common mistakes to avoid, court rulings, and FAQs). Let’s dive in!

The Surprising Truth About Home Equity Loan Tax Deductions

At first glance, home equity loans (often called second mortgages) seem like a ticket to easy tax deductions – after all, they’re secured by your home just like your primary mortgage. However, the IRS’s home mortgage interest deduction rules draw a sharp line based on how you use the money:

• “Qualified” use (home acquisition or improvement): If you use the loan proceeds to buy, build, or substantially improve the home that secures the loan, the interest meets the definition of acquisition indebtedness. In plain English, that means you’re using the debt for your home itself – for example, financing a new addition, a roof replacement, or purchasing the home. Such interest is usually tax deductible (as part of your itemized deductions on Schedule A), as long as you stay within the allowed debt limits.

• “Personal” use (everything else): If you use the loan for personal expenditures unrelated to improving the secured home – like paying off credit cards, covering medical expenses, or investing in a business or stocks – then the interest is not deductible as home mortgage interest under current federal law. The IRS considers that personal interest, which was eliminated as a deduction decades ago (with one temporary exception for home equity that has since been suspended by TCJA).

Key point: It’s not the name of the loan that matters, but the use of the funds. Even if you have a traditional home equity loan or HELOC, you only get a tax break if those dollars went back into your home (or to buy another home and that property is the collateral for the loan). Conversely, even a standard cash-out refinance of your first mortgage could lose deductibility on the “cashed-out” portion if you pocket the money for personal use.

Additionally, you can only deduct home equity loan interest if:

• The loan is secured by a qualified residence (your main home or one secondary home). Example: A loan against your primary home to remodel that home qualifies. But borrowing against your home to improve a different property does not qualify – the debt must be secured by the same home that’s being improved or purchased.

• Your total mortgage debt stays within IRS limits: Currently, you can only deduct interest on up to $750,000 of total home acquisition debt ($375,000 if married filing separately). Loans above that mean some interest isn’t deductible. (Prior to 2018 the limit was $1 million, and it will revert to $1 million in 2026; more on that later.)

• You itemize deductions on your tax return. If you take the standard deduction (as roughly 90% of taxpayers now do, thanks to higher standard deductions), you won’t get any benefit from mortgage interest – including home equity loan interest. The interest deduction only helps if all your itemized expenses (mortgage interest, property taxes, etc.) exceed your standard deduction amount.

In short, home equity loan interest can be tax deductible – but only in the right circumstances. Next, we’ll unpack the specific laws and changes that determine those circumstances.

Federal vs. State Tax Rules: Does Your State Make a Difference?

For the most part, federal law dictates whether your home equity loan interest is deductible, and these rules apply when you file your U.S. income tax return. However, it’s also important to consider state income tax laws, which sometimes have their own twists:

• Federal law (IRS rules): Under federal tax law, as explained, home equity interest is deductible only for home-related uses and within debt limits. This is the rule that changed with the TCJA from 2018 through 2025 (eliminating deductions for personal-use home equity debt).

• State income tax: States that have an income tax often start with your federal itemized deductions as a baseline. Most states conform to federal definitions of mortgage interest. This means if your interest isn’t deductible federally, it likely won’t be deductible on your state return either. However, there are some differences. For instance, a few states don’t conform to all TCJA changes or allow certain deductions on the state return even if you took the federal standard deduction.

  • Example: In New York and some other states, you can choose to itemize on the state return even if you took the standard deduction federally. In such cases, a New York homeowner who didn’t itemize federally (and thus got no federal mortgage interest deduction) might still itemize for state purposes and deduct mortgage and home equity interest on their state taxes.

  • Some states offered property tax credits or separate homeownership deductions but generally, interest on home equity loans follows the federal treatment.

• No state income tax: If you live in a state with no income tax (like Florida or Texas) or a state that doesn’t allow itemized deductions, the question of a state-level mortgage interest deduction is moot – there’s no state deduction to worry about. The focus remains on federal rules.

Bottom line: Always check your state tax guidelines. While federal law is the primary hurdle for deducting home equity loan interest, ensure you’re not missing any state-specific benefits (or restrictions). In most cases, though, the federal criteria (use of funds, loan limits, itemizing) will determine if you get a deduction at all.

IRS Rules and Definitions (Publication 936 Explained)

To truly master this topic, it helps to speak the IRS’s language from IRS Publication 936: Home Mortgage Interest Deduction. Key definitions include:

• Qualified Residence Interest: The IRS term for interest that is eligible for deduction. It includes interest on acquisition indebtedness (and used to include home equity indebtedness prior to 2018).

• Acquisition Indebtedness: A mortgage (loan) used to buy, build, or substantially improve a qualified residence and secured by that residence. This can be your primary home or one other home (for example, a vacation house). Importantly, a home equity loan or HELOC can count as acquisition debt if the money is used for improvements to the home. Even a portion of a loan can qualify if part of it went into the home.

• Home Equity Indebtedness: A mortgage secured by a qualified residence but used for other purposes (not to buy/build/improve that home). Before 2018, interest on up to $100,000 of such debt ($50,000 if married filing separately) was deductible. TCJA suspended this category for 2018–2025, meaning there is currently no federal deduction for interest on these “personal use” home equity loans.

• Qualified Home: For interest deduction purposes, this generally means your main home (primary residence) and one second home of your choice. A second home could be a house, condo, or even a boat or RV if it has living, sleeping, and cooking facilities. You can’t deduct mortgage interest on third or fourth properties (unless they’re rental/business properties, which fall under different rules).

• Grandfathered Debt: Mortgages taken out on or before October 13, 1987. Interest on these is fully deductible regardless of amount or purpose (an old rule that affects fewer people each year as those loans get paid off or refinanced).

• Debt Limits: As noted, $750,000 is the combined limit of loans (acquisition debt) that can generate deductible interest for loans originated after Dec 15, 2017. The older $1,000,000 limit applies if the debt was incurred earlier and “grandfathered.”

  • Additionally, no deduction is allowed for any mortgage debt (including home equity loans) beyond the fair market value of the home. In other words, you cannot deduct interest on loan amounts that exceed what the property was worth when you got the loan (plus improvements). This prevents over-leveraging solely for a tax benefit.

• Personal Interest: Any interest that’s not mortgage interest on a qualified residence, not student loan interest, not business interest, etc. Personal interest (like interest on credit cards, personal loans, etc.) has been non-deductible since the Tax Reform Act of 1986. The only reason home equity loan interest was ever deductible for personal use was that tax law carved it out as a special exception – one that is now temporarily on hold.

Publication 936 provides worksheets to calculate your deductible interest if you have a mix of deductible and non-deductible use (for example, one loan used for both home improvement and personal expenses). If you have a mixed-use loan, you effectively have to treat it as two loans: the portion of the principal that went into the home (eligible interest) and the portion that didn’t (non-deductible interest). Keeping good records of how you spent the money is crucial in these situations.

By understanding these IRS definitions and rules, you can determine whether your home equity loan interest qualifies – and how much of it you can actually deduct. Next, let’s look at how a major law – the TCJA – changed these rules and what the future holds.

How the Tax Cuts and Jobs Act (TCJA) Changed the Game

The Tax Cuts and Jobs Act of 2017 dramatically changed mortgage interest deductions, including those for home equity loans:

• No more deduction for home equity “personal” loans (2018–2025): Prior to 2018, you could deduct interest on up to $100,000 of home equity debt even if you used it for anything (vacation, car, etc.). TCJA suspended this. From 2018 through 2025, if the loan isn’t used to buy, build, or improve a home, its interest is not deductible, period. There were no grandfather provisions for existing home equity loans – meaning even if you took the loan out before TCJA, you lost the deduction on that interest unless the funds were used for your home.

• Lower debt cap for new loans: TCJA lowered the maximum loan balance eligible for interest deductions from $1 million to $750,000 (for new mortgages after Dec 15, 2017). This combined limit applies to the sum of your first mortgage and any home equity loans/HELOCs used as acquisition debt. (Loans before the cutoff date were grandfathered under the old $1M cap, and refinances of those loans can keep the higher cap up to the remaining old principal balance.)

• Fewer people itemize now: TCJA roughly doubled the standard deduction and capped state tax deductions (SALT), meaning far fewer taxpayers benefit from itemizing. This indirectly means many homeowners get no benefit from mortgage interest because they no longer itemize. As mentioned, only about 10% of returns itemize now, down from ~30%. Homeowners with relatively modest mortgages and low itemizable expenses likely use the standard deduction, making the mortgage interest deduction (including on home equity loans) moot for them.

What happens after 2025? Many TCJA provisions for individuals expire after tax year 2025 (unless Congress extends or changes the law). If no action is taken, in 2026 the rules revert to pre-2018 law:

• The mortgage debt limit for interest deduction goes back up to $1,000,000 (plus $100,000 of home equity debt).

• The separate home equity debt deduction (up to $100,000) returns, meaning interest on home equity loans could be deductible even if used for personal purposes, up to that loan balance limit.

• Standard deductions reduce to prior levels (potentially more people itemizing again).

This reversion could re-open the door for homeowners to once again deduct interest on loans used for things like debt consolidation or tuition – but only time will tell if Congress will extend the current restrictions or not. It’s wise to stay tuned to tax law updates around 2025.

Planning tip: If you are considering a large home equity loan primarily for personal use (not home improvement), you might strategize around these dates. For instance, waiting until 2026 (if the old rules return) could restore the tax deductibility of interest on such a loan. Conversely, if laws change or the current limits are extended, those personal-use interest deductions may continue to be disallowed. Always consult a tax advisor on big moves like this, since tax laws can change.

Pros and Cons of Using Home Equity Loans for Tax Deductions

Using a home equity loan with an eye on tax benefits has upsides and downsides. Here’s a quick comparison:

Remember, a tax deduction shouldn’t be the sole reason to take a loan – but if you need to borrow for a qualified purpose, the deduction is a nice perk. Weigh the real savings (often $0.22–$0.35 saved per $1 of interest, depending on your tax bracket) against the costs and risks.

Examples: When Is Home Equity Loan Interest Deductible (and When Is It Not)?

Real-world scenarios can illustrate how these rules play out. Below are three common situations and whether the home equity loan interest is deductible:

Scenario 1: Home Improvement Project

Scenario 2: Debt Consolidation and Personal Expenses

Scenario 3: Funding a Business or Investment

These examples show the clear line the IRS draws. If the money goes into your home, you typically get a deduction; if it goes elsewhere, you don’t (at least not as a mortgage interest deduction). Some cases, like Priya’s, may allow deduction under different rules, but not as a personal housing deduction.

Avoid These Common Mistakes

Many homeowners and even some tax filers stumble over the home equity loan interest rules. Here are critical mistakes to avoid:

1. Assuming “a loan is a loan” – Don’t assume all home-related loans are automatically tax deductible. For instance, interest on a home equity line used for personal needs is not deductible now. Always consider how the money is used.

2. Overlooking the need to itemize – A common mistake is paying off a bunch of interest and expecting a refund, only to realize you’re taking the standard deduction. If your total deductible expenses don’t exceed the standard deduction, your home equity interest won’t actually reduce your tax bill at all.

3. Not tracking loan use – If you spent only part of a home equity loan on renovations and the rest on something else, you must allocate interest between the deductible and non-deductible portions. Without receipts or records, you might deduct too much (a red flag in an audit) or too little (missing a tax benefit). Keep documentation (contracts, invoices, etc.) to prove how every dollar was used.

4. Exceeding the debt limits – Remember that the IRS debt cap (e.g. interest on debt above $750k for recent loans) isn’t just theory. If you have a large mortgage and add a home equity loan that pushes you above the limit, a portion of your interest is not deductible. Some homeowners mistakenly deduct all interest reported on Form 1098 without realizing they exceeded the limit. Use IRS worksheets or a tax advisor to calculate your allowed interest if you’re in this territory.

5. Wrong collateral – A tricky mistake is using the wrong property as collateral. Example: You take an equity loan against House A to fund improvements on House B. That interest is not considered acquisition debt for House B because the loan wasn’t secured by House B. You’ve essentially created a personal loan from House A’s perspective. The IRS won’t allow a deduction in that scenario (this catches people who, say, draw equity from a paid-off home to buy a vacation home – better to get a mortgage on the vacation home itself so the interest qualifies).

6. Forgetting the “cost of home” rule – You generally cannot deduct interest on debt that exceeds your home’s purchase price plus improvements. If you aggressively cash-out refinance or borrow more than your property’s worth (or its adjusted cost basis), the interest on the excess portion isn’t deductible. This is a lesser-known rule that prevents creative abuse of equity debt.

7. Neglecting AMT considerations – High-income taxpayers should note that under pre-TCJA law, interest on home equity debt wasn’t deductible for Alternative Minimum Tax (AMT) if the funds were used for personal purposes. While TCJA greatly raised AMT exemptions (and currently disallows the interest entirely in regular tax), if the old rules return in 2026, interest on a personal-use equity loan might be deductible for regular tax but still not for AMT. This is something to be mindful of in long-term planning.

By steering clear of these mistakes, you ensure you only deduct what you’re legally allowed and keep proper records. When in doubt, consult with a tax professional – it’s easier to get advice upfront than to battle the IRS later over an improper deduction.

Lessons from Court Rulings and IRS Guidance

Over the years, courts and the IRS have clarified how the mortgage interest deduction applies. Here are a few notable rulings and guidelines that shed light on home equity loans:

• Voss v. Commissioner (2015) – This was a landmark case in which the Ninth Circuit Court of Appeals ruled that the mortgage interest limits ($1 million acquisition debt + $100k home equity debt under old law) apply per taxpayer, not per residence. In practical terms, this meant an unmarried couple co-owning a home could each deduct interest on up to $1.1 million of debt (effectively doubling the limit that a married couple would get on the same home). The IRS later acquiesced to apply this ruling nationwide. Takeaway: If you co-own a home with someone you’re not married to, each of you may qualify for the full debt limit for interest deduction.

• IRS Chief Counsel Memo (2018) on HELOCs post-TCJA – After TCJA, there was confusion about HELOCs. The IRS issued guidance confirming that interest on home equity loans and HELOCs is still deductible if used to buy, build, or improve the home, but not otherwise. This memo essentially reinforced the “use-of-proceeds” rule: the label on the loan doesn’t matter, usage does.

• Limits tied to home value – Tax regulations (and prior court decisions) emphasize that you cannot deduct interest on mortgage debt that exceeds your home’s value. For example, if you bought your home for $200,000 and it’s still worth $200,000, and you borrow $300,000 against it, interest on the extra $100,000 wouldn’t qualify. The rationale comes from an older Treasury regulation: your total mortgage debt for deduction purposes can’t exceed the home’s acquisition cost plus improvements. Tax court cases have backed this, denying deductions when taxpayers tried to circumvent this rule.

• Equitable ownership requirement – Courts have consistently held that you can only deduct mortgage interest if you are an owner (or equitable owner) of the property. For instance, if a parent takes out a loan on their house to give funds to an adult child, the parent can deduct the interest (they’re the owner and borrower). But if a parent simply pays the child’s mortgage (the child owns the home), the parent cannot deduct that interest because they’re not the owner or debtor on that loan. In one Tax Court case, a taxpayer paying a girlfriend’s mortgage could not deduct it – he wasn’t on the title or loan. Takeaway: The deduction is tied to both owing the debt and owning the home that secures it.

• State-level implications: While federal rules dominate, there have been state tax cases too (particularly in states that decoupled from federal law). Generally, state courts follow the federal definitions of qualified mortgage interest closely. But it’s worth noting – if a state doesn’t follow the TCJA change, a resident might still deduct home equity interest on the state return even when it’s disallowed federally. Always know your state’s stance (as mentioned earlier).

These rulings underscore that the IRS and courts expect taxpayers to strictly adhere to the letter of the law on home mortgage interest. There’s little wiggle room for creative interpretations – the authorities often side with the IRS if you stretch the rules. Staying within the clear boundaries (and keeping evidence) is the best strategy.

Key Concepts and Terms to Know

To wrap up the technical groundwork, here are some key concepts, terms, and entities in this topic and how they relate:

• Home Equity Loan (Second Mortgage): A lump-sum loan using your home’s equity as collateral. It typically has a fixed rate and term. For taxes, it’s treated like any mortgage: interest is deductible only if used for qualifying purposes. Often used for home improvements or large expenses.

• HELOC (Home Equity Line of Credit): A revolving credit line against your home equity (you can draw as needed, like a credit card). Tax-wise, interest on HELOCs follows the same rules as home equity loans. HELOCs often fund ongoing projects or act as emergency funds – but remember, only the portion used for home improvements (on the home that’s collateral) yields a deductible interest.

• Primary vs. Second Home: The IRS lets you deduct mortgage interest on two residences – your main home and one other qualified home (which you choose each year if you have multiple). A second home could be a vacation home. Important: If you rent out a “second home,” there are additional rules (it might be considered a rental property for tax purposes if rented too much). For home equity interest to be deductible, the loan must be tied to either your primary or that chosen second home.

• Acquisition Debt: Money you borrowed to purchase or improve a home, secured by that home. This term is central post-TCJA – only acquisition debt interest is deductible. If you refinance or use a home equity loan, trace whether the funds went into the home; if yes, that portion of debt is acquisition debt.

• Home Equity Debt: Under pre-TCJA law, this referred to borrowing against your home for any purpose (not necessarily improving the home). While currently not deductible (2018–2025) as a category, this term will revive in 2026 if old rules return. It had a $100k limit for deductible interest and was also not deductible under the AMT.

• IRS Publication 936: The IRS publication that explains the home mortgage interest deduction in detail. It includes examples, definitions, and worksheets to calculate your deductible interest, especially if you have multiple loans or mixed-purpose loans. Pub 936 is a go-to reference for tax professionals when determining how much interest a client can deduct.

• Schedule A (Itemized Deductions): The section of your tax return where mortgage interest (including qualifying home equity loan interest) is deducted. Interest on a home equity loan doesn’t get a special line – it’s added to your total mortgage interest deduction. You only fill out Schedule A if you’re itemizing.

• Tax Cuts and Jobs Act (2017): The law that overhauled the tax code starting in 2018. For homeowners, it capped the state tax deduction, lowered the mortgage interest cap to $750k, and crucially suspended home equity interest deductions for non-home uses. It also increased the standard deduction, which indirectly reduced the number of people claiming mortgage interest.

• Sunset Provision (2026): Many individual tax changes from TCJA expire after 2025 due to the law’s sunset clauses. If Congress doesn’t act, 2026 will see prior rules come back (including the $1M mortgage cap and $100k home equity interest deduction). This looming change is key for long-term tax planning.

• Internal Revenue Code §163(h): The section of the tax law that defines the limitation on deduction of personal interest and then carves out qualified residence interest as an exception. It’s the legal bedrock for everything we’ve discussed – including definitions of acquisition and home equity debt and the $750k/$1M limits.

• IRS vs. Tax Court vs. Congress: These players shape the rules. Congress writes the laws (like TCJA or prior tax acts) deciding what’s deductible. The IRS issues regulations and guidance (like Pub 936 or clarifying statements) to implement those laws. The Tax Court (and other courts) resolves disputes when taxpayers and the IRS disagree on how the law applies, often setting precedents (e.g. the Voss case) that clarify gray areas. Together, they create the framework homeowners must navigate.

Knowing these terms helps you understand the conversation around home equity loans and taxes. With the terminology under your belt, let’s address some of the burning questions people often have on this topic.

FAQs: Quick Answers to Common Questions

Q: Is interest on a home equity loan or HELOC tax deductible in 2025?
A: Yes – if you use the funds to buy, build, or improve the home securing the loan (and you itemize your deductions). If the money is used elsewhere, the interest isn’t deductible.

Q: Can I deduct a home equity loan used to pay for college tuition or medical bills?
A: No. Under current law, interest on a home equity loan used for personal expenses (education, medical, credit cards, etc.) is not tax deductible. It would become deductible only if post-2025 rules change.

Q: Is HELOC interest treated differently from a regular home equity loan for taxes?
A: No – the IRS treats home equity lines of credit the same as lump-sum home equity loans. It doesn’t matter how you borrow the equity; what matters is how you spend it and loan limits.

Q: What about interest on a cash-out refinance – is that deductible?
A: Only the portion used for home acquisition or improvements qualifies. When you refinance and take cash beyond the remaining mortgage, interest on that extra cash is deductible only if used to improve the property.

Q: Will home equity loan interest be deductible again for any purpose after 2025?
A: Likely yes. If the law reverts in 2026, interest on up to $100,000 of home equity debt (no matter the use) will be deductible once more. Keep an eye out for new legislation, though.

Q: Do I need my lender to classify the loan a certain way for the deduction?
A: No. The bank doesn’t decide the tax treatment – you do, based on usage. Lenders issue Form 1098 showing interest paid, but they don’t report how you used the money. It’s on you to substantiate that it was for a qualifying purpose.

Q: Can I deduct home equity interest on a rental property or third home?
A: Not as a personal itemized deduction. Only your primary and one secondary residence qualify for the “qualified residence” interest deduction. For a rental, interest is usually deductible against rental income (as a business expense), not on Schedule A.

Q: If I don’t itemize federally, can I still get a tax benefit from my home equity loan interest?
A: Possibly at the state level. Some states allow you to deduct mortgage interest on your state return even if you took the standard deduction federally. But on your federal return, no itemization means no mortgage interest deduction.

Q: What records should I keep for my home equity loan?
A: Keep the loan documents (to show it’s secured by your home), Form 1098 from the lender (showing interest paid), and all receipts/invoices for how you spent the loan funds. This documentation will support your deduction if the IRS asks.

Q: Is it worth taking out a home equity loan just for the tax deduction?
A: Generally, no. The tax deduction only saves you a fraction of the interest you pay (equal to your tax bracket). Don’t borrow money just for a deduction – only do so if it makes financial sense otherwise. The deduction is a bonus, not a reason in itself.