HELOC interest is deductible only if you use the borrowed money to buy, build, or improve a home

You can deduct HELOC interest on your federal tax return, but only under one condition: the money you borrowed must have been used for home improvements or to purchase real estate. If you used your HELOC to pay off credit cards, fund a vacation, or pay medical bills, that interest is not deductible. The IRS treats HELOC interest the same way it treats mortgage interest — it is only deductible if the debt is secured by your home and the proceeds went toward the home itself or real property.

This rule comes from Section 163(h) of the Internal Revenue Code, which limits the deduction for personal interest but allows an exception for "may have access to residence interest." A HELOC qualifies as long as the total debt secured by your home (your mortgage plus the HELOC) does not exceed the fair market value of the home, and the borrowed funds were used for a may have access to purpose.

Key Takeaways

  • HELOC interest is deductible only if you used the borrowed money to buy, build, or substantially improve a home you own.
  • The total of your mortgage and HELOC combined cannot exceed the fair market value of your home for the interest to be deductible.
  • You must itemize deductions on Schedule A to claim HELOC interest; the standard deduction may be larger and eliminate the benefit.
  • Money withdrawn from a HELOC but not yet spent does not generate deductible interest until you actually use it for a may have access to purpose.
  • Keeping records of how you used HELOC funds is essential, because the IRS may ask for proof that the money went toward home-related expenses.

What counts as a may have access to use of HELOC funds

The IRS recognizes these uses as may have access to for the interest deduction: purchasing a home, building a new home, or making capital improvements that add value to your home or prolong its useful life. Capital improvements include a new roof, an addition, a kitchen remodel, a new HVAC system, or a deck. Repairs that straightforward maintain the home — like fixing a leaky roof or repainting — do not count as improvements and do not make the interest deductible.

Refinancing an existing mortgage with a HELOC also qualifies, as long as the new loan amount does not exceed what you owed on the old mortgage. If you refinance for more than you owed, only the interest on the amount that matches your old debt is deductible.

Uses that do not may have access to include paying off credit card debt, funding education, paying medical expenses, buying a car, taking a vacation, or paying off personal loans. Even if you borrowed the money through a HELOC secured by your home, the interest is not deductible if the funds went to these purposes.

The debt limit that affects your deduction

Your HELOC interest is deductible only if the total amount you owe on all loans secured by your home does not exceed the fair market value of that home. For example, if your home is worth $400,000 and you have a $250,000 mortgage and a $100,000 HELOC balance, your total secured debt is $350,000 — below the home's value, so the HELOC interest is deductible. If your HELOC balance were $200,000 instead, your total would be $450,000, which exceeds the home's value, and none of the HELOC interest would be deductible.

This rule applies regardless of how you used the HELOC funds. Even if every dollar went toward a kitchen remodel, if your total secured debt exceeds your home's value, the deduction is lost. You will need to know your home's current fair market value to determine whether you meet this test. An appraisal, a recent property tax assessment, or a real estate agent's estimate can serve as evidence of value.

Itemizing versus the standard deduction

Claiming a HELOC interest deduction requires you to itemize deductions on Schedule A of Form 1040, rather than take the standard deduction. For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your total itemized deductions — mortgage interest, HELOC interest, property taxes, charitable contributions, and other may have access to expenses — do not exceed the standard deduction, you will receive no tax benefit from deducting the HELOC interest.

Many homeowners find that the standard deduction is larger than their itemized deductions, especially after the 2017 tax law changes that capped the deduction for state and local taxes. Before you count on a HELOC interest deduction, calculate whether itemizing will actually lower your tax bill. If it will not, there is no point in tracking and reporting the deduction.

How to report HELOC interest on your tax return

If you itemize deductions, you report HELOC interest on Schedule A, Form 1040, in the section labeled "Interest You Paid." You will receive a Form 1098-H from your HELOC lender if you paid $600 or more in interest during the year. The form shows the total interest paid, but you are responsible for determining how much of that interest is deductible based on how you used the funds.

If you used part of your HELOC for a may have access to purpose and part for a non-may have access to purpose, you must calculate the deductible portion. For example, if you borrowed $50,000 and used $30,000 for a home addition and $20,000 to pay off credit cards, only the interest on the $30,000 is deductible. This requires you to track the use of funds carefully and keep records of how the money was spent.

Report the deductible amount on Schedule A, line 8a (mortgage interest and points reported to you on Form 1098) or line 8b (mortgage interest not reported on Form 1098). HELOC interest typically goes on line 8b if your lender did not report it on a Form 1098.

Documentation you need to keep

The IRS does not require you to attach receipts or proof to your tax return, but you must keep records in case of an audit. For a HELOC used for home improvements, keep receipts, invoices, and contracts showing what work was done and when. For a HELOC used to purchase or refinance a home, keep the closing documents and the promissory note.

If you used a HELOC for multiple purposes, document how much went to each use. A spreadsheet showing the date of each withdrawal, the amount, and the purpose is sufficient. If you withdrew funds but have not yet spent them, the interest on that unspent balance is not deductible until you actually use the money for a may have access to purpose.

Common mistakes that cost deductions

One frequent error is assuming that any HELOC interest is deductible straightforward because the loan is secured by your home. The use of the funds is what matters, not the form of the loan. Another mistake is failing to check whether your total secured debt exceeds your home's value — if it does, no HELOC interest is deductible, even if you used the money for improvements.

A third mistake is not comparing the benefit of itemizing against the standard deduction. Many people report HELOC interest on their return without realizing that the standard deduction is larger and they receive no actual tax savings. Finally, some homeowners deduct interest on a HELOC used to pay off other debts, not realizing that refinancing consumer debt does not may have access to, even when the new loan is secured by the home.

Frequently Asked Questions

Can I deduct HELOC interest if I used the money to pay off credit cards?

No. The IRS does not allow a deduction for interest on debt used to pay off personal loans or credit cards, even if that debt is secured by your home. The rule depends on how you used the borrowed funds, not on the form of the loan.

What if I withdrew money from my HELOC but haven't spent it yet?

Interest on unspent HELOC funds is not deductible. The deduction applies only to the portion of the loan that you have actually used for a may have access to purpose. Once you spend the money on a home improvement or home purchase, the interest on that amount becomes deductible.

Do I need an appraisal to prove my home's value for the debt limit test?

No formal appraisal is required. You can use a recent property tax assessment, a real estate agent's comparative market analysis, or an online valuation tool. The IRS straightforward needs evidence that your total secured debt does not exceed the home's fair market value.

If my HELOC interest is not deductible, can I deduct it as a business expense?

Only if you used the HELOC funds to start or operate a business and the loan is secured by your home. If the funds went to personal use, the interest is not deductible under any category, regardless of whether you later earned income.

Does the $750,000 limit on mortgage debt affect HELOC deductions?

Yes. The total of your mortgage and HELOC combined cannot exceed $750,000 (or $375,000 if married filing separately) for loans taken out after December 15, 2017. Interest on debt above this limit is not deductible. Loans taken out before that date have a $1,000,000 limit.