Home equity loan interest is deductible only if you use the money to buy, build, or improve your home

The interest you pay on a home equity loan is tax-deductible only under one condition: the borrowed money must go toward buying, building, or substantially improving the property that secures the loan. If you borrow against your home's equity but use the money for anything else — a car, credit card payoff, medical bills, or a vacation — that interest is not deductible.

This rule comes from the Internal Revenue Service (IRS) and applies to both home equity loans and home equity lines of credit (HELOCs). The distinction matters because many people take out home equity loans for purposes other than home improvement, which means they cannot deduct the interest even though the loan is secured by their house.

You must also meet a second requirement: the total of all loans secured by your home cannot exceed the home's fair market value. For most homeowners, this is not a practical barrier, but it exists in the tax code.

Key Takeaways

  • Home equity loan interest is deductible only when you use the borrowed money to buy, build, or improve your home.
  • If you use a home equity loan for debt consolidation, medical expenses, or any other purpose, the interest is not deductible.
  • You must itemize deductions on your tax return to claim home equity loan interest — the standard deduction alone does not allow you to deduct it.
  • The total of all loans secured by your home cannot exceed the home's fair market value for the interest to be deductible.
  • You report deductible home equity loan interest on Schedule A (Form 1040) if you itemize.

How the IRS determines what counts as a may have access to use

The IRS looks at what you actually did with the money, not what you intended to do or what the lender called the loan. If you borrowed $50,000 against your home and deposited it into your checking account, then paid off credit cards, the IRS will not allow the interest deduction because the money did not go to home improvement.

may have access to uses include: adding a room, replacing a roof, installing new plumbing or electrical systems, upgrading kitchen or bathroom fixtures, adding insulation, replacing windows, or paying off a construction loan used to build the home. Repairs that restore the home to its previous condition generally may have access to. Improvements that add value or extend the life of the home may have access to. Painting the exterior, fixing a leaky faucet, or replacing worn carpeting typically count as repairs or maintenance.

Non-may have access to uses — even if the money goes into a home-related account — include paying property taxes, paying homeowners insurance, paying mortgage principal, or paying a contractor for work that does not improve the property. Paying down a first mortgage with home equity loan proceeds does not make the interest deductible, because the money did not go to improvement.

You must itemize deductions to claim the interest

Even if your home equity loan interest qualifies under the IRS rules, you can only deduct it if you itemize deductions on your tax return. Most taxpayers claim the standard deduction instead, which means they cannot deduct home equity loan interest at all.

The standard deduction for 2024 is $14,600 for single filers and $29,200 for married filing jointly (these amounts change each year). If your total itemized deductions — including mortgage interest, property taxes, charitable donations, and home equity loan interest — add up to more than the standard deduction, then itemizing makes sense and you can claim the home equity loan interest. If your itemized deductions total less than the standard deduction, you are better off taking the standard deduction and cannot deduct the home equity loan interest.

You report itemized deductions on Schedule A (Form 1040). Home equity loan interest goes on line 8 of Schedule A, under "Home equity loans not used to buy, build, or improve your home" — but only if you used the money for home improvement. If you used it for anything else, you cannot report it anywhere.

The $750,000 loan limit and how it affects you

The IRS allows you to deduct interest on up to $750,000 in home equity debt combined across all loans secured by your home (this limit applies to loans taken out after December 15, 2017). If you have a $400,000 mortgage and a $500,000 home equity loan, both used for home improvement, you can only deduct interest on $750,000 of the total $900,000. The interest on the remaining $150,000 is not deductible.

For most homeowners, this limit does not matter because their total home debt is well below $750,000. But if you have multiple properties or a very large home equity loan, you need to track the total. The limit applies to the combined balance of all mortgages and home equity loans on all homes you own, not just one property.

What happens if you use the money for multiple purposes

If you borrow $30,000 and use $20,000 for a kitchen remodel and $10,000 to pay off a car loan, only the $20,000 portion qualifies for the interest deduction. You must track how the money was actually spent and calculate the deductible interest based on the may have access to portion only.

The safest way to document this is to keep the loan proceeds separate from other money. If you borrow $20,000 specifically for a roof replacement, deposit it into a separate account, and pay the contractor directly from that account, you have clear proof of the use. If you deposit the money into your general checking account and then pay for multiple things, you need to track which payments came from the borrowed funds.

The IRS does not require you to submit receipts with your tax return, but you should keep them in case of an audit. A cancelled check, contractor invoice, or credit card statement showing the work performed is enough to prove the use of the funds.

How to report the deduction on your tax return

If you have a may have access to home equity loan and you itemize deductions, you will report the interest on Schedule A (Form 1040). You need to know the total interest you paid during the tax year — your lender sends this on Form 1098-H (Home Mortgage Interest Statement) or Form 1098 (Mortgage Interest Statement), depending on the type of loan.

Enter the deductible interest amount on line 8 of Schedule A. If you have both a mortgage and a home equity loan, both interest amounts go on Schedule A. Then add up all your itemized deductions and compare the total to the standard deduction. If itemizing gives you a larger deduction, file Schedule A with your Form 1040.

If the lender does not send you a 1098-H or 1098, you can calculate the interest yourself using your loan statements. The statement shows how much of each payment goes to interest and how much goes to principal. Add up the interest portions for the entire year.

State tax rules may differ from federal rules

Some states follow the federal deduction rules exactly, while others have different limits or do not allow the deduction at all. A few states do not have an income tax, so the question does not explore. If you live in a state with income tax, check your state's tax agency website or speak with a tax preparer to learn whether your state allows the deduction and under what conditions.

For example, some states cap the deduction at a lower amount than the federal $750,000 limit, or they may not allow the deduction if the loan was taken out after a certain date. State rules change, so it is worth confirming the current rules for your state before you file.

Frequently Asked Questions

Can I deduct home equity loan interest if I used the money to pay off credit cards?

No. The IRS only allows the deduction if you used the borrowed money to buy, build, or improve your home. Paying off credit card debt, medical bills, or any other non-home expense makes the interest non-deductible, even though the loan is secured by your house.

What if I used part of the home equity loan for improvement and part for something else?

You can only deduct the interest on the portion used for home improvement. If you borrowed $40,000 and used $25,000 for a bathroom remodel and $15,000 for a car purchase, you calculate the deductible interest based on the $25,000 portion only. Keep receipts and documentation showing how the money was spent.

Do I have to file Schedule A to deduct home equity loan interest?

Yes. You can only claim the deduction if you itemize deductions on Schedule A (Form 1040). If you take the standard deduction instead, you cannot deduct home equity loan interest, even if it qualifies under the IRS rules. Compare your total itemized deductions to the standard deduction for your filing status to decide which is better for you.

Does my lender send me a form showing how much interest I paid?

Most lenders send Form 1098-H or Form 1098 by January 31 of the following year, showing the interest you paid during the tax year. If you do not receive one, contact your lender. You can also calculate the interest yourself using your monthly loan statements, which break down each payment into interest and principal.

Can I deduct interest on a home equity line of credit (HELOC)?

Yes, if you used the borrowed money for home improvement. HELOCs follow the same rules as home equity loans. Only the interest on the portion you drew and used for may have access to purposes is deductible. If you drew $50,000 but only used $30,000 for a roof replacement, you can only deduct interest on the $30,000.