Is My Home Equity Loan Tax Deductible?

Although the tax laws have changed, in some cases you can still deduct interest paid on your home equity loan or home equity line of credit (HELOC). As an example and according to the IRS, interest paid on a home equity loan or HELOC that was used to “buy, build or substantially improve” the residence that secures the loan is tax deductible. That’s a big change from prior years when the interest was tax deductible regardless of what the home equity loan money was used for. As under the prior law, an eligible home equity loan or HELOC must be secured by the taxpayer’s main home or second home (qualified residence). It must not exceed the cost of the home and must meet other requirements as well. Starting for the 2018 tax year, taxpayers filing jointly are only allowed to deduct interest on $750,000 of “qualified residence loans.” This is down from the previous limit of $1,000,000. For married taxpayers filing separately, the new limit is $375,000 in, down from $500,000 previously. 

You can no longer deduct interest on home equity loans that are used for personal expenses, such as vacations or to pay off credit card debt. According to the IRS website, home improvements that are approved are any that “add to the value of your home, prolong your home’s useful life, or adapt your home to new uses. To clarify, the IRS wrote “repairs that maintain your home in good condition, such as repainting your home, aren’t substantial improvements. However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements.”

Examples of home equity expenses eligible for tax-deductible interest

Replacing the roof or siding

Remodeling the kitchen

Renovating a bathroom

Building on room additions

Electrical or plumbing upgrades

New driveway or walkways

Adding on a new deck

Building a home 

Examples of home equity loan expenses that not are eligible for deducting interest

Purchasing new furniture

Purchasing new décor


Debt consolidation

Paying off credit cards


Tuition payments

Medical bills

Purchasing a car

When deducting interest paid on a home equity loan or HELOC, be sure to keep all receipts and invoices for labor and materials. You’ll need them in case you ever get audited. Before tax time, you should receive an IRS Form 1098 (Mortgage Interest Statement) form your lender or lenders. This form will show the interest you paid on your primary mortgage, home equity loan or home equity line of credit in the previous year. Contact your lender if you haven’t received it. 

You’ll need to itemize to get the home equity interest deduction

It’s important to remember that the deduction of eligible interest on a home equity loan or home equity line of credit is still an itemized deduction. Meaning you need to itemize to get the tax benefit. In order for it to make sense, your itemized deductions, which will include mortgage interest, will need to be greater than the standard deduction. Speak to your tax advisor to determine whether it’s in your best interest to itemize or to take the standard deduction.

Finally, even without the deduction, home equity loans are still a cost-effective way to borrow money. The interest rates on home equity loans are typically lower than personal loans because they are secured by the value of the home. You can still use a home equity loan or HELOC for personal expenses. You just can’t take the interest deduction on the amount used for non-eligible purposes. Tap to learn more about Spirit Financial Credit Union Home Equity Loans. Read more about the difference between a home equity loan and a HELOC on the Spirit Financial Blog.

For more information, see IRS Publication 936 (2018), Home Mortgage Interest Deduction. The publication also goes into great detail about dollar limits as they relate to deductions, as well as grandfathered debts.