Is interest on a home equity line of credit tax-deductible?

A home equity line of credit (HELOC) can help cover large expenses or consolidate other high-interest-rate debts. Because a HELOC uses your home as collateral, these loans often offer lower rates than other types of loans, and in some cases, the interest is tax-deductible.

Is interest on a home equity line of credit tax-deductible?

The short answer is: Maybe. Whether your home equity loan interest is tax-deductible depends on two factors:

1. How you spend the funds (and where you spend them)
2. The total amount of your mortgage debt

To benefit from the deduction, you have to itemize deductions. That generally means your total itemized deductions must be greater than the standard deduction available for your filing status.

For the 2022 tax year (tax returns filed in 2023), the standard deductions are:

• $25,900 for married couples filing jointly
• $12,950 for single taxpayers and married people filing separately
• $19,400 for heads of household

If your total itemized deductions — including mortgage interest, state and local taxes, and charitable contributions — are less than the standard deduction available for your filing status, you won’t benefit from deducting interest paid on a HELOC.

When you can claim interest on a HELOC

To be tax-deductible, you need to meet all the following requirements:

Use the funds to "buy, build, or substantially improve" your property

For home equity line of credit interest to be tax-deductible, you must use the funds to purchase, build or substantially improve the home securing the line of credit, according to IRS guidelines.

When it comes to HELOCs, this usually means taking out a HELOC to pay for a remodeling project that adds to the home’s value, such as a new kitchen.

The project also has to improve the property securing the loan. So, for example, if you take out a HELOC on your primary home and use the funds to buy, build, or improve a vacation home, the interest isn’t deductible.

Have less than $750,000 in total home mortgage debt

You can only deduct interest on up to $750,000 in mortgage debt, including your first mortgage and any home equity loans or lines of credit. The limit is half that ($375,000) for married couples filing separate returns.

For example, say the balance on your first mortgage is $700,000, and you take out a $100,000 home equity line of credit to remodel your kitchen. In that case, you could deduct all the interest from your first mortgage, but only half of the interest paid on your HELOC. The rest would be nondeductible because your total indebtedness exceeds the $750,000 cap.

When you can’t claim interest on a HELOC

One of the advantages of a HELOC compared to other types of loans is that you can use the funds for just about any purpose — including starting a business, paying for college, refinancing other high-interest debts or making big-ticket purchases.

But the interest you pay on a HELOC isn’t deductible in all circumstances. Using the HELOC funds for anything other than buying, building or substantially improving your home renders the interest nondeductible. This means you can’t deduct HELOC interest if you use the funds to pay for a wedding or vacation or refinance other debts.

What expenses count for deducting HELOC interest?

Before the Tax Cuts and Jobs Act of 2017, homeowners had a lot more flexibility when deducting interest from a home equity loan. Prior to 2018, you could deduct interest on up to $1 million in interest on a first mortgage, plus up to $100,000 of home equity debt for a total cap of $1.1 million of indebtedness.

Plus, the IRS didn’t care how you used the loan funds. So, you could use a home equity loan to refinance credit card debt or pay for a wedding, and it was all deductible as long as you stayed under the $100,000 home equity debt cap.

Currently, HELOC interest is only deductible if you use it for improvements that add value, increase the property’s longevity or adapt it for new uses. Some examples include:

• Building an addition, such as a new primary suite or deck
• Installing central air conditioning
• Replacing old windows with energy-efficient ones
• Replacing the roof
• Redoing duct work
• Adding new insulation in an attic or exterior walls
• Installing an elevator
• Renovations that take down interior walls or widen hallways to make the home more accessible

Basic maintenance, such as painting or minor repairs, isn’t considered a "substantial" improvement. So you can’t deduct interest on a HELOC used for these expenses unless they’re part of a larger remodeling project.

Can you get a HELOC or a home equity loan without a tax return?

Many lenders require a copy of your most recent year or two years of tax returns as part of their home equity line of credit application package. So getting approved for a HELOC without a tax return may be challenging.

But it depends on the lender’s requirements and the type of income you receive. For example, if the majority of your income is reported on a W-2, the lender might approve your HELOC application with just copies of recent pay stubs and two years of W-2 forms from your employer.

However, if you’re self-employed or retired, lenders may require a copy of your return to verify your income.

Is a HELOC worth it if it isn’t tax-deductible?

Taking out a home equity line of credit might still be worth it, even if the interest isn’t deductible. But it depends on your situation and needs.

For example, if you want to refinance high-interest debts, a HELOC may allow you to save a significant amount of interest, even if you don’t get a tax benefit from deducting the interest.

Likewise, if you need to borrow money for another reason, such as refinancing home renovations, a HELOC may be much less expensive than other borrowing options, such as a personal loan or credit card.

Just keep in mind that a HELOC is secured by your home. If you fall behind on your payments, you could end up in foreclosure. So before taking on any home equity debt — for any purpose, tax-deductible or not — consider when you can afford to make the payments.

If you decide a cash-out refinance is a better fit for your financial goals, you can compare mortgage refinance rates from multiple lenders in minutes using Credible.