How Home Equity Loans Affect Your Taxes

If you own a home and need extra cash, you might think about getting a home equity loan or a home equity line of credit. These are often called second mortgages. They let you borrow against the value you have built up in your house. But before you sign anything, you need to understand how the interest you pay on that loan can affect your taxes. The rules changed a few years ago, and many homeowners still get confused.

For a long time, people could deduct the interest on any loan secured by their home, no matter what they used the money for. You could take out a home equity loan to pay for a vacation, buy a car, or cover credit card bills, and the interest counted as a tax deduction. That changed with the Tax Cuts and Jobs Act that went into effect in 2018. Now the rules are tighter, and the tax deduction depends on what you do with the money.

The key point is simple. If you use the money from a home equity loan or line of credit to buy, build, or substantially improve your home, the interest is generally tax deductible. This means if you are adding a new roof, finishing a basement, building an addition, or remodeling a kitchen, you can likely deduct the interest on that loan. The IRS considers these expenses as home acquisition debt. But if you use the money for something else, like paying off student loans, funding a business, or taking a dream trip, the interest is not deductible.

There is also a limit on how much home loan debt you can deduct interest on. For mortgages taken out after December 15, 2017, the total amount of debt you can deduct interest on is capped at $750,000 for married couples filing jointly, or $375,000 if you are single. This cap includes your first mortgage plus any second mortgage or home equity loan. So if you already have a $600,000 first mortgage, you can only deduct interest on up to $150,000 more in home equity debt, and only if that extra debt is used for home improvements. If your total mortgage debt is above the cap, you lose some or all of the interest deduction on the amount over the limit.

Another thing to know is that the rules for home equity loans that were taken out before 2018 are different. If you had a home equity loan before that date, you may still be able to deduct the interest regardless of how you used the money, as long as the loan was originated before December 15, 2017. But this is a rare situation for most homeowners. Also, if you refinance an old home equity loan, the new loan may be subject to the new rules, so check with a tax professional.

Many homeowners mistakenly think that all home equity loan interest is automatically deductible. That is not true anymore. Lenders may send you a Form 1098 that shows the interest you paid, but that form does not mean the interest is deductible. You have to prove to the IRS that the loan proceeds were used for home improvements. That means you need to keep good records. Save receipts, contracts, and invoices for the work done. If you ever get audited, you will need to show that the money actually went into your home.

What counts as a substantial improvement? The IRS definition is pretty broad. It includes any work that adds value to your home, prolongs its useful life, or adapts it to new uses. Common examples are new heating and cooling systems, new windows, a new roof, landscaping, a deck, a swimming pool, a home office addition, or major repairs like fixing a foundation. Routine maintenance like painting or cleaning gutters does not count. If you are unsure whether a project qualifies, ask a tax advisor.

One more detail. The deduction for home equity loan interest is an itemized deduction. That means you have to give up the standard deduction to claim it. For most homeowners, the standard deduction has gone up a lot in recent years. It is now around $30,000 for a married couple in 2025. If your total itemized deductions, including mortgage interest, state and local taxes, and charity, do not add up to more than the standard deduction, you will not benefit from deducting the interest at all. So before you assume a home equity loan will lower your taxes, do the math. It might not help as much as you think.

There is also a special rule if you are using a home equity line to buy a second home or rental property. The rules get more complicated in those cases, and you should definitely talk to a tax professional. But for a typical homeowner using a home equity loan for home improvements, the deduction is still available as long as you stay under the debt limit.

The bottom line is that home equity loans can be a good way to finance home upgrades, and the interest can be tax deductible if you use the money correctly. But you cannot assume the deduction is automatic. Keep records, know your total mortgage debt, compare to the standard deduction, and always check with a tax specialist before relying on the deduction. The rules are not as simple as they used to be, but with a little planning, you can make the tax code work for you.