HELOC Tax Deductions: A Homeowner's Guide
One of the most appealing features of a HELOC has historically been its potential for tax deductions. However, the Tax Cuts and Jobs Act of 2017 significantly changed the rules. It's crucial to understand what is and isn't deductible before you borrow.
The Most Important Rule
As of today, interest on HELOCs is only deductible if the funds are used to "buy, build, or substantially improve" the home that secures the loan. If you use the HELOC to pay for personal expenses like credit card debt or tuition, the interest is not deductible.
What Does "Substantially Improve" Mean?
This is where many homeowners get confused. The IRS defines a "substantial improvement" as one that adds to the value of your home, prolongs its useful life, or adapts it to new uses. Routine repairs and maintenance do not count.
Qualifying vs. Non-Qualifying Uses
| Qualifying Use (Interest Likely Deductible) | Non-Qualifying Use (Interest Not Deductible) |
|---|---|
| Building a new room addition | Paying off student loans |
| A complete kitchen or bathroom remodel | Buying a car, boat, or RV |
| Replacing the entire roof | Consolidating credit card debt |
| Installing a new HVAC system | Funding a vacation or wedding |
| Adding a new deck or patio | Paying for medical bills |
| Finishing a basement | Investing in stocks or bonds |
Loan Limits and Record Keeping
Even if you use the funds for a qualifying purpose, there are limits. The deduction is capped by the mortgage interest rules. For 2024, you can generally only deduct interest on up to $750,000 of total mortgage debt ($375,000 if married filing separately). This total includes your primary mortgage and any home equity debt combined.
Meticulous record-keeping is non-negotiable. You must be able to prove how you used the HELOC funds. Keep all receipts, contractor invoices, and bank statements that show a clear trail from the HELOC draw to the home improvement expense.
Tax Deduction FAQs
You can only deduct the portion of the interest that corresponds to the home improvement spending. This makes accurate record-keeping even more critical. You would need to "trace" the funds and calculate the interest allocation, a process that a tax professional should assist with.
Not necessarily. Form 1098 reports the total amount of mortgage interest you paid. It is your responsibility, not the lender's, to determine if you meet the IRS requirements for deducting that interest. The form is a starting point, but the use of the funds is what determines deductibility.
Last Updated: June 29, 2025
Author: The HELOCcalc.com Editorial Team
Disclaimer: This information is for educational purposes only and does not constitute financial or tax advice. Tax laws are complex and subject to change. Please consult with a qualified, independent tax advisor to discuss your specific situation.