How Home Equity Loan Interest Affects Your Taxes Now

If you own a home and have taken out a second mortgage or a home equity line of credit, you’ve probably heard that the interest you pay might be tax deductible. But the rules changed a few years ago, and a lot of homeowners are still confused about what counts and what doesn’t. Let’s clear that up in plain English.

First, a quick reminder of what a home equity loan or HELOC is. It’s a loan that uses your home as collateral, on top of your first mortgage. You get a lump sum with a home equity loan, or a line of credit you can draw from as needed with a HELOC. People use them for home improvements, paying off credit card debt, college costs, or even buying a new car. But the tax treatment depends entirely on what you spend the money on.

Back in 2017, a big tax reform law called the Tax Cuts and Jobs Act changed the rules for deducting mortgage interest. Before that, you could deduct interest on home equity loans up to $100,000 no matter what you used the money for. That’s no longer true. Starting in 2018, the interest on a home equity loan or HELOC is only deductible if the money is used to “buy, build, or substantially improve” the home that secures the loan. That phrase is the key.

“Substantially improve” means you’re adding value to your property. Think new roof, new kitchen, finished basement, new siding, or adding a deck. It also includes things like installing solar panels, replacing old windows, or adding a bathroom. These are improvements that increase your home’s value or extend its useful life. Routine repairs do not count. Fixing a leaky faucet, patching drywall, or painting a room are just maintenance, not improvements. The IRS is pretty clear on that.

Now, what happens if you use the HELOC money for something else, like paying off credit card bills, funding a vacation, or buying a car? Then the interest is not deductible. Period. It doesn’t matter that the loan is secured by your home. The tax law now focuses on how the money is spent, not just that it’s a mortgage.

There is also a cap on the total amount of debt you can deduct interest on. For married couples filing jointly, the limit is $750,000 of total mortgage debt (first mortgage plus any second mortgage or HELOC). If you’re single or married filing separately, the limit is $375,000. These limits apply to loans taken out after December 15, 2017. If you had a home equity loan before that date, the old rules might still apply in some cases, but that’s a rare situation.

Let’s walk through an example. Say you have a first mortgage of $500,000 and you take out a $50,000 HELOC to put in a swimming pool. The pool is a substantial improvement, so the interest on that $50,000 is deductible, as long as your total mortgage debt stays under $750,000. But if you instead use that same $50,000 to pay off your credit cards, the interest stops being deductible. The IRS does not care about the label on the loan; they care where the cash went.

Keep in mind that you have to itemize your deductions on Schedule A to claim mortgage interest. Most homeowners now take the standard deduction, which was doubled in the 2017 law. For 2024, the standard deduction is about $29,200 for married couples and $14,600 for singles. That means unless your total itemized deductions—mortgage interest, property taxes, charitable gifts, medical expenses—add up to more than that, you won’t get any extra benefit from deducting your HELOC interest anyway. Many people find that after the tax law changed, itemizing no longer makes sense.

What about refinancing? If you refinance your first mortgage and also take cash out, the tax rules are similar. The interest on the cash-out portion is only deductible if you use that cash to improve your home. So be careful when you close on a cash-out refinance: track exactly where the money goes. The IRS expects you to keep records like receipts, contracts, and invoices showing the improvements you made.

If you sell your home later, the improvements you paid for with a HELOC can also affect your capital gains calculation. When you sell your primary residence, you can exclude up to $250,000 of profit (or $500,000 for a married couple) from taxes. The improvements you made add to your “cost basis,” which lowers your taxable profit. So even if the HELOC interest wasn’t deductible during the years you paid it, the improvement itself can help you down the road.

A common question is whether you can deduct interest on a HELOC used to buy a second home or rental property. The answer is no, not under the home mortgage interest deduction. If you use the loan to buy a second home, that second home’s mortgage interest has its own rules. For a rental property, the interest is normally a rental expense, not a personal deduction.

The biggest takeaway is simple: if you want to deduct the interest on a home equity loan or HELOC, use the money to fix up your house. Paying for college, medical bills, or debt consolidation won’t qualify. And even if you do use it for improvements, check whether itemizing makes sense for your overall tax situation. When in doubt, talk to a tax preparer or use a reputable tax software that asks about the purpose of the loan. Mistakes on this can trigger an audit, and the IRS does not accept “I didn’t know” as an excuse. Keep good records, spend the money wisely, and you’ll avoid surprises at tax time.