HELOC interest is tax deductible only when you use the borrowed money to buy, build, or substantially improve the home that secures the line, and only if you itemize deductions and stay within the federal mortgage debt cap. Everything else about home equity lines of credit — the rate, the draw period, the lender — is beside the point at tax time. What the IRS cares about is where the dollars went.
What Counts as a Qualifying Use
The tax code calls deductible mortgage debt “acquisition indebtedness.” For a HELOC, that means proceeds used to acquire, construct, or substantially improve the residence securing the loan.1Internal Revenue Service. Frequently Asked Questions on Real Estate Taxes and Mortgage Interest It does not matter that the loan is secured by your home. What matters is the use of the funds.
A substantial improvement adds value to the property, extends its useful life, or adapts it to a new use. Adding a bathroom, replacing the roof, finishing a basement, building a deck. Routine maintenance does not clear that bar. Repainting a bedroom, fixing a leaky faucet, or patching drywall are upkeep, not improvements, and interest tied to those uses is not deductible.
The residence has to be your main home or one designated second home. A HELOC on your primary house used to build a garage at a qualifying second home can still generate deductible interest.2Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses A property you rent out full-time without personal use does not qualify.
Uses That Don’t Qualify
Any HELOC spending outside the buy-build-improve test is personal home equity debt, and the interest on that portion is not deductible.1Internal Revenue Service. Frequently Asked Questions on Real Estate Taxes and Mortgage Interest The common non-qualifying uses:
- Paying off credit card balances
- Buying a car
- Funding a vacation
- Covering medical bills
- Paying college tuition
A less obvious trap: paying property taxes or homeowner’s insurance with HELOC money also fails the test. Those are carrying costs of owning a home, not improvements to it. Cosmetic refreshes and landscaping that doesn’t materially increase the property’s value fall on the same side of the line. A useful gut check is whether the project would add to the home’s cost basis for capital gains purposes. If it increases basis, it generally satisfies the substantial improvement requirement; if it doesn’t, it generally doesn’t.
The $750,000 Debt Cap
Even when every dollar of HELOC spending goes toward a qualifying improvement, the deduction is limited by the federal debt cap. You can deduct interest only on the first $750,000 of total acquisition debt ($375,000 if married filing separately). That ceiling covers all mortgage debt on your main home and second home combined: first mortgage, refinanced balances, and the qualifying portion of any HELOC.3Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
An example. If you carry a $600,000 first mortgage and take a $200,000 HELOC to remodel, your total acquisition debt is $800,000. Interest on $750,000 of that is deductible. Interest attributable to the remaining $50,000 is not, regardless of how the money was spent.
If your existing mortgage balance already sits at or above $750,000, a new HELOC generates zero deductible interest even if every cent funds a qualifying improvement. It falls entirely outside the cap.
Grandfathered Debt From Before December 16, 2017
Mortgages taken out on or before December 15, 2017, fall under the older, higher limit of $1 million ($500,000 if married filing separately).2Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses The grandfathering applies only to the principal balance that existed on that date. If you refinanced that older loan, the refinanced amount keeps the higher limit only up to the balance you were refinancing; any additional cash pulled out is treated as new debt under the $750,000 cap.4Office of the Law Revision Counsel. 26 USC 163 – Interest
You Have to Itemize
The deduction only helps you if you itemize on Schedule A instead of taking the standard deduction.5Internal Revenue Service. Schedule A (Form 1040) For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household. Roughly 90 percent of taxpayers take the standard deduction because their itemized totals don’t exceed it.
Your HELOC interest, state and local taxes (capped at $10,000), charitable contributions, and other itemized expenses all have to add up to more than the standard deduction before the HELOC interest saves you a dollar. Someone paying $8,000 a year in HELOC interest may still come out ahead with the standard deduction if their other deductible expenses are modest. Run the numbers both ways.
Mixed-Use HELOCs
Homeowners often use a HELOC like a checking account, drawing for a bathroom remodel one month and paying off a car loan the next. When the same credit line funds both qualifying and non-qualifying expenses, you have to allocate interest between the two categories. Only the share tied to home improvement spending is deductible.3Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
The allocation is proportional. If $80,000 of a $100,000 HELOC balance funded a qualifying kitchen renovation and $20,000 went to personal expenses, 80 percent of the annual interest is potentially deductible, subject to the debt cap.
This is where deductions fall apart on audit. Homeowners who commingle HELOC draws with personal spending and can’t show which dollars went where lose the deduction. The cleanest approach is to open a separate HELOC strictly for the improvement project, deposit draws into a dedicated bank account, and pay contractors from that account. The paper trail then writes itself.
Documentation and Where to Report It
Your lender sends Form 1098 each January reporting total mortgage interest paid during the prior year.6Internal Revenue Service. Instructions for Form 1098 – Mortgage Interest Statement The form does not break out how much of that interest qualifies. It reports what you paid; you determine what portion is deductible based on how the money was used.
If your total acquisition debt exceeds $750,000, Publication 936 includes a worksheet for prorating interest between the deductible and non-deductible portions.3Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction Report the deductible amount on Line 8 of Schedule A.5Internal Revenue Service. Schedule A (Form 1040)
Keep contractor invoices, improvement contracts, receipts, and bank statements showing HELOC disbursements tied to each project. Property records generally need to be held until the statute of limitations expires for the year you sell or dispose of the property.7Internal Revenue Service. How Long Should I Keep Records? In practice, that means keeping improvement records for as long as you own the home plus at least three years after the tax year you sell, since those records also feed your cost basis and capital gains calculation.
The Rules Are Now Permanent
The restrictions were originally set to expire after the 2025 tax year, which would have restored the $1 million debt cap and a separate $100,000 home equity interest deduction. That reversion did not happen. The One Big Beautiful Bill Act, enacted in 2025, made the TCJA changes to itemized deductions permanent.8Tax Policy Center. How Did the TCJA and OBBBA Change the Standard Deduction and Itemized Deductions? The $750,000 cap stays, and interest on home equity debt used for non-improvement purposes remains non-deductible. Publication 936 for 2025 returns states that “no matter when the indebtedness was incurred, you can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren’t used to buy, build, or substantially improve your home.”3Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
State Returns Can Be Different
Everything above is the federal analysis. Some states conform fully to the federal treatment; others still follow pre-TCJA rules or set their own thresholds. A state that never adopted the TCJA restrictions might allow a deduction for HELOC interest spent on personal expenses even though the federal return does not. A few states impose stricter limits than the $750,000 federal cap. Check your state revenue department’s guidance for the rules that apply to your return.