Is the interest on a HELOC tax deductible?

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The interest on a HELOC is tax deductible in certain situations. Learn when you can claim this interest on your tax return. (Shutterstock)

A home equity line of credit, or HELOC, can be a beneficial financial product for many homeowners. This line of credit allows you to borrow against the equity in your home, which you can use for repairs, renovations, or anything else you have in mind.

As tax time rolls around, you may wonder whether the interest on a HELOC is tax-deductible. Here’s a look at when you can deduct this interest, when you can’t, and what you’ll need to provide to the IRS in order to claim the home mortgage interest deduction.

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Is the interest on a HELOC tax deductible?
How does the home mortgage interest deduction work?
How to claim the home mortgage interest tax deduction
Other tax benefits for homeowners

Is the interest on a HELOC tax deductible?

The simple answer is yes, the interest on a home equity line of credit can often be tax deductible — but not always.

Whether or not you can claim the interest you paid on a HELOC on your tax return depends on how you used the money.

The Tax Cuts and Jobs Act (TCJA) of 2017 changed the deduction that allows taxpayers to deduct mortgage interest on a primary or secondary home, also known as a qualified residence. With the passage of this law, tax deductions on HELOCs are suspended from 2018 through 2026, unless you meet certain criteria.

When you can claim interest on a HELOC

The interest charged on a home equity line of credit can be considered tax deductible as long as it meets the following requirements:

The loan must be secured by the taxpayer’s main home or secondary home (qualified residence).
The funds borrowed with the HELOC must be used to either buy, build, or improve that same home (or homes).

This means that if you borrow from your primary home’s equity with a HELOC and use those funds to renovate the kitchen, build an addition to the home, or repair your roof, the interest charges on that HELOC are likely tax deductible.

When you can’t claim interest on a HELOC

On the flip side, your HELOC interest may not be tax deductible if it doesn’t meet the above criteria. So, if the home isn’t your primary or secondary residence, if you use the funds to improve a third property, or if you use the money for expenses not related to home improvement, you likely won’t be able to claim the interest on your tax return.

For example, if you pull equity from your home with a HELOC, then use those funds to pay off your student loans, go on vacation, pay off credit card debt, or buy an investment property, the interest probably won’t be tax deductible.

How does the home mortgage interest deduction work?

The home mortgage interest deduction allows you to write off a portion of your mortgage loan’s interest, as long as you meet certain IRS guidelines. This can help reduce your overall tax burden by reducing your taxable income for that tax year.

In order to take the mortgage interest deduction, you’ll need to ensure that:

The mortgaged debt on your home(s) doesn’t exceed $750,000 total (or $375,000 if you’re married filing separately). If the total of your home mortgage debt exceeds this amount, only a portion of your mortgage interest for the year can qualify as tax-deductible. Prior to Dec. 16, 2017, higher mortgage limits used to apply — $500,000 for married taxpayers filing separately or $1 million for everyone else.
You’re only deducting the interest paid on your primary or secondary home. Additional properties are excluded from this deduction.
You itemize your deductions. You can only take the mortgage interest deduction if you itemize. If you choose to take the standard deduction at tax time, this won’t take into account the specifics of your mortgage interest paid for the year.

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How to claim the home mortgage interest tax deduction

Claiming the home mortgage interest deduction is relatively straightforward, whether you’re claiming the interest paid on your primary home mortgage or that of an eligible HELOC:

Gather your tax documents. Your lender should send you a Form 1098, Mortgage Interest Statement, showing how much mortgage interest you paid on your loan in the previous tax year. Lenders are required to send this form as long as you paid $600 or more in interest that year. You’ll also need your closing disclosure document, which shows you the amount of money borrowed in home equity from your property. Be sure to keep your documents in a safe place until you’re ready to file your taxes.
Determine whether your loans qualify. The mortgage debt limit is $750,000 for most filers, which includes the mortgage loan and any additional loans — such as a HELOC or second mortgage — on your primary or secondary homes. If your loans combined exceed this amount, you won’t be able to claim all your mortgage interest as a deduction.
Determine whether your expenses qualify. The interest paid on a HELOC is tax deductible as long as you use the funds to purchase, repair, or make substantial improvements to the property that secures the loan. So, if you take out a HELOC on your primary home to renovate your second home, the interest won’t qualify. But if you spend that HELOC money on your primary home instead, some or all of it may qualify.
Save your receipts. If you’re ever audited, it will be important to provide proof that you used the HELOC funds on an eligible property.
Itemize your deductions when you file your taxes. For some taxpayers, the standard deduction can result in a lower tax burden for the year. For others, though, itemizing deductions may be more beneficial. For the 2021 tax year, the standard deduction for married couples filing jointly is $25,100; for single filers or married couples filing separately, the standard deduction is $12,550. It’s important to decide which is best for you and your tax situation — deducting the interest specifically from a HELOC can only be done by itemizing.

If you have questions about your taxes — or which deductions you can itemize in order to claim home equity loan or HELOC interest — it’s best to speak with a tax professional.

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Other tax benefits for homeowners

Aside from the mortgage interest tax deduction, homeowners who itemize their deductions can take advantage of many other tax benefits, including:

Real estate (property) taxes — Both state and local real estate taxes paid on your home can be tax deductible. This deduction is limited to $10,000 per year, or $5,000 if married filing separately.
Qualified mortgage insurance premiums — Private mortgage insurance, or PMI, is required on most conventional mortgage loans with a down payment of less than 20%. If you paid mortgage insurance premiums over the year, you may be able to deduct this expense.
Mortgage points — If you paid points to reduce your home loan’s interest rate, you may be able to deduct them on your itemized taxes.

Taking out a home loan can be costly, especially when you factor in the interest charges. If you plan to pull from the equity in your home with a HELOC, you may be able to deduct those interest charges when it comes time to file your taxes. If you’d like to learn more about HELOC interest, mortgage loan interest, and itemizing your deductions, consult a trusted tax professional.