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A home equity line of credit (HELOC) could help you fund a home renovation or consolidate debt at a lower interest rate. But there's another benefit you may not be aware of: You may be able to deduct the interest you pay on a HELOC from your federal income taxes.
Here's what you need to know about the rules for deducting HELOC interest and how to do it.
Is HELOC Interest Tax Deductible?
The interest on home equity loans and HELOCs is tax deductible as long as you use the funds to "buy, build or substantially improve your home," according to the IRS.
In other words, your HELOC interest may be deductible if you use the funds to remodel your kitchen or build an addition to your house. However, HELOC interest would not be tax deductible if you used the funds to consolidate debt, pay for emergency expenses or cover other personal living costs.
To deduct your HELOC interest, you'll need to itemize your taxes, rather than taking the standard deduction.
Rules for Deducting HELOC Interest
The IRS sets rules and limits on deducting interest for HELOCs and home equity loans. These rules can vary depending on when you took out your HELOC, your tax filing status and how you use your HELOC funds.
Up until late 2017, you could take a full deduction on your HELOC interest no matter how you used your loan funds. The IRS capped your total loan debt, including your home mortgage and HELOC, at $1 million for joint filers and $500,000 for separate and single filers.
These rules changed when the Tax Cuts and Jobs Act of 2017 was enacted. Since then, HELOC interest is only deductible when its funds are used to buy or significantly improve your primary residence or second home. Additionally, deduction limits dropped by 25%.
With the change, you can no longer deduct interest on your HELOC if you use it to consolidate debt, renovate your home or make a large purchase like a boat or vacation.
Here's a breakdown of the IRS' guidelines for deducting HELOC interest.
| IRS Rules and Limits for HELOC Interest Tax Deduction | |||
|---|---|---|---|
| Date HELOC Taken Out | Loan Debt Limit (Married Filing Jointly) | Loan Debt Limit (Married Filing Separately) | Conditions for Interest Deductibility |
| December 15, 2017 and earlier | $1 million | $500,000 | Any purpose (until 2025), regardless of use; HELOC must be for primary or secondary home |
| After December 15, 2017 | $750,000 | $375,000 | Deductible only if used to buy, build or substantially improve the primary or secondary home |
Source: IRS
Keep in mind, the 2017 tax reform raised the IRS standard deduction substantially, so it may not make sense to itemize your taxes even if you do have HELOC interest you can deduct. In 2024, the standard deduction is $14,600 for single filers and married couples filing separately and $29,200 for married couples filing jointly. Of course, taking the deduction is a smart move if your itemized deductions, including HELOC interest, are higher than the standard deduction amount.
For more details about deducting the interest you pay on your HELOC, refer to the IRS Publication 936, Home Mortgage Interest Deduction.
Learn more >> Standard vs. Itemized Deductions: Which Saves You More?
What You'll Need to Claim the HELOC Interest Tax Deduction
To claim HELOC interest on your income taxes, it's a good idea to collect some supporting documents, including:
- Mortgage interest statement (Form 1098): Your HELOC lender should send you this form or make it available in your online account dashboard. If necessary, contact your lender to get it before you file your income taxes for the year. You'll need it to show exactly how much HELOC interest you've paid during the year.
- Schedule A (Form 1040): You'll need this form to itemize the mortgage interest deduction on your tax return. Use Schedule E to deduct interest on your second home if you use it as a rental property, including improvements you make using HELOC funds.
- Proof of eligible expenses: Collect all receipts and invoices that prove you used HELOC funds to buy, build or improve the home that secured the HELOC. This includes receipts for completed work, materials, labor and permits. It's also wise to save your bank statements that prove how the funds were used.
Tax laws change every year, so consult with a tax professional to make sure you have the most up-to-date information and necessary documents.
How to Deduct HELOC Interest on Taxes
If you qualify to deduct HELOC interest on your annual tax return, follow these steps to proceed:
1. Make Sure Itemizing Is Worth It
Add up all of your eligible deductions for the year, such as mortgage interest, property taxes and charitable donations. Then, assess whether your deductions fall short or exceed the standard deduction, which is up 5% in 2024. Here are the new amounts:
- Single filers: $14,600
- Heads of household: $21,900
- Married couples: $29,200
If your standard deduction is higher than the total of all your itemized deductions, then it doesn't make sense to itemize. However, if your deductions are greater than the standard deduction, continue following the steps to deduct your HELOC interest.
2. Gather Your Supporting Documents
As mentioned, you'll want to gather necessary documents like your Form 1098, Form 1040, receipts and bank statements. Having the proper documents can help you accurately report your HELOC deduction and may come in handy if the IRS ever audits you. For this reason, it's a good idea to hold on to your tax return and supporting documents for at least three years.
3. Itemize Your Total Deductions
Once you calculate your total deductions, including your HELOC interest, enter the amount on line 8a of Schedule A (Form 1040).
More Tax Breaks for Homeowners
Deducting mortgage interest is just one of many tax breaks available to homeowners. If eligible, you may also deduct the following:
- Property taxes: State and local property taxes may be itemized as a deduction on Schedule A of Form 1040. The IRS allows a deduction of up to $10,000 for state and local income taxes (less if you're married and file separately)—including property taxes.
- Discount points: If you purchased points to reduce the interest rate when you bought your home, you can deduct them in the year you took out your mortgage. Similarly, you can also deduct points you pay to lower your rate on a refinance if you use the funds to improve your primary residence.
- Mortgage tax credit: The IRS offers a mortgage credit certificate program to help those with lower incomes afford homeownership. To qualify, you must obtain a mortgage credit certificate before you buy your home. If eligible, you may claim the credit on Form 8396 as part of your home mortgage interest. This credit amount you can deduct varies but is capped at $2,000. Learn more in the IRS Publication 530 (2023), Tax Information for Homeowners.
The Bottom Line
HELOCs deliver many valuable benefits, including lower interest rates than other financing options. They also provide flexible funding when you need it and potential tax deductions if you use the funds to make substantial home improvements. If you itemize your deductions, this benefit could help you save money on your income taxes.
You'll typically need good credit and adequate home equity to qualify for a HELOC. Before applying, check your credit report and credit score for free with Experian to see where your credit stands and what HELOC rates you may qualify for.