Last updated: May 21, 2026

Are Home Equity Loans Tax Deductible?

How the Home Equity Loan Tax Deduction Works

The IRS allows you to deduct interest paid on home equity loans, but only under specific conditions. The key requirement is that you must use the borrowed funds to buy, build, or substantially improve the home that secures the loan. This rule has been in place since the Tax Cuts and Jobs Act (TCJA) took effect in 2018 and continues through 2026.

Before the TCJA, homeowners could deduct interest on up to $100,000 of home equity debt regardless of how the money was spent. That changed dramatically. Now, the IRS treats home equity loan interest the same as primary mortgage interest — it’s only deductible when tied to acquisition or improvement of your residence. The combined limit for all mortgage debt is $750,000 for most filers.

For example, if you have a $400,000 primary mortgage and take out a $100,000 home equity loan to add a new room, all $500,000 of debt qualifies for the interest deduction. But if you used that $100,000 to pay off credit cards, none of the home equity loan interest would be deductible.

• Qualifying use: Buying, building, or substantially improving your home (kitchen remodel, new roof, room addition).
• Non-qualifying use: Debt consolidation, college tuition, vacations, car purchases, or any personal expense.
• Mixed use: If you use part of the loan for improvements and part for personal expenses, only the improvement portion is deductible.

Debt Limits and Filing Requirements

The $750,000 limit applies to the combined total of your primary mortgage and any home equity loans used for qualifying purposes. If you’re married filing separately, the limit drops to $375,000. Mortgages originated before December 15, 2017, may qualify for the older $1,000,000 limit under grandfathering rules.

To claim the deduction, you must itemize your deductions on Schedule A of your federal tax return. This means the total of your itemized deductions — including mortgage interest, state and local taxes (capped at $10,000), charitable contributions, and medical expenses — must exceed the standard deduction. For 2026, the standard deduction is approximately $15,000 for single filers and $30,000 for married filing jointly.

Many homeowners find that the standard deduction is more beneficial, especially with the $10,000 SALT cap in place. Run the numbers carefully before assuming the home equity loan deduction will save you money. If your total itemized deductions don’t exceed the standard deduction, you’re better off taking the standard deduction even if your interest technically qualifies.

What Counts as a Substantial Improvement

The IRS defines substantial improvement broadly, but it must add value to your home, prolong its useful life, or adapt it to new uses. Routine maintenance and repairs typically don’t qualify. Adding a bathroom, replacing the roof, installing a new HVAC system, or building a deck are all considered substantial improvements.

Cosmetic updates can qualify if they’re part of a larger renovation project. For instance, repainting a room during a kitchen remodel counts as part of the improvement. But repainting alone without structural changes would likely not meet the substantial improvement threshold.

Energy-efficient upgrades are particularly strong qualifying expenses. Solar panel installations, energy-efficient windows, insulation upgrades, and geothermal heating systems all count. These improvements have the added benefit of potentially qualifying for separate energy tax credits in addition to the mortgage interest deduction.

• Qualifies: Kitchen or bathroom remodel, roof replacement, room addition, new HVAC, solar panels, foundation repair.
• Does not qualify: Routine cleaning, lawn care, minor cosmetic fixes, furniture purchases, appliance replacements (unless part of a larger remodel).
• Gray area: Landscaping, painting, and flooring — these may qualify as part of a larger improvement project but not on their own.

How to Claim the Deduction

Your lender will send you Form 1098 at the beginning of each year showing how much mortgage interest you paid. If you have both a primary mortgage and a home equity loan with the same lender, the interest may appear on a single 1098. If the loans are with different lenders, you’ll receive separate forms.

When filing your taxes, report the deductible interest on Schedule A, Line 8a (for amounts reported on Form 1098). If only a portion of your home equity loan was used for qualifying purposes, you’ll need to calculate the deductible percentage yourself and keep supporting documentation.

Consider consulting a tax professional if your situation involves mixed-use funds, multiple properties, or loans that straddle the December 2017 cutoff date. The rules can be complex, and mistakes can trigger IRS scrutiny. A CPA or enrolled agent can ensure you’re claiming the correct amount and have proper documentation.

Tax Deduction Impact at Current Rates

With home equity loan rates averaging 8.5% to 9.5% in early 2026, the tax deduction can provide meaningful savings for homeowners in higher tax brackets. On a $100,000 home equity loan at 9% interest, you’d pay approximately $9,000 in interest during the first year. If you’re in the 24% tax bracket, that deduction saves you about $2,160 in federal taxes.

The savings increase for higher earners. At the 32% bracket, that same $9,000 deduction saves $2,880. At the 35% bracket, it’s $3,150. These savings effectively reduce your net borrowing cost, making home equity loans more attractive than non-deductible alternatives like personal loans.

Compare this to a personal loan at 11% to 15% interest with no tax deduction. Even though home equity loan rates are currently elevated at 7.5% to 10.5%, the after-tax effective rate for qualifying borrowers can drop to 5.5% to 8% depending on your tax bracket. That’s a significant advantage for funding home improvements.

Last updated: March 2026. Rates and requirements are subject to change. Always verify current terms with lenders directly.

Reviewed by Priya Iyer, CFA®. Priya Iyer, CFA®, is a chartered financial analyst with 14 years of experience in self-directed retirement vehicles, alternative assets, and residential mortgage products. Last reviewed May 2026.