Are Home Equity Loans Tax Deductible? The IRS Rules Explained

The IRS allows a deduction when the loan proceeds pay for capital improvements that add value to your home, prolong its useful life, or adapt it to new uses. Examples include adding a bathroom, finishing a basement, replacing a roof, installing central air conditioning, or building a deck.

You may deduct interest on up to $750,000 of combined mortgage debt ($375,000 married filing separately) used to acquire or substantially improve your main home and one second home. This cap applies to loans originated after December 15, 2017; debt taken out on or before that date follows the old $1 million limit ($500,000 married filing separately).

The deduction delivers value only if you itemize deductions on Schedule A and your total itemized deductions exceed the standard deduction—$13,850 for single filers and $27,700 for married filing jointly in 2023 (figures adjusted annually for inflation by the IRS). Because the Tax Cuts and Jobs Act nearly doubled the standard deduction and capped the state and local tax (SALT) deduction at $10,000, fewer than 10 percent of U.S. households now itemize, according to the Tax Policy Center.

Report deductible home mortgage interest, including qualifying home equity loan interest, on Schedule A (Form 1040), line 8a. Your lender will send Form 1098 (Mortgage Interest Statement) by January 31 showing the total interest paid during the tax year; this amount appears in box 1.

Consider professional guidance if you used loan proceeds for multiple projects, refinanced and took cash out, own rental property or a home office, live in a high-tax state where SALT limits affect your itemization threshold, or carry mortgage debt near or above $750,000. A certified public accountant (CPA) or enrolled agent (EA) can apply the IRS tracing rules to your specific fact pattern, calculate any required proration, and ensure you meet substantiation requirements before you file.

Can I deduct home equity loan interest if I rent out part of my home?

If you rent a portion of your home, you must allocate expenses between personal use and rental use. Only the interest attributable to the space you occupy as your residence may qualify for the Schedule A mortgage interest deduction, and only if the loan funded improvements to that space.

Does the home equity loan deduction apply to a second home or vacation property?

Are points and fees on a home equity loan tax deductible?

Origination points paid to obtain a home equity loan for improvements may be deductible as mortgage interest, but usually must be amortized over the life of the loan rather than deducted in full the year you pay them. Appraisal fees, title insurance, and recording fees are not deductible as interest; they may be added to your home's cost basis for capital-gains purposes when you sell.

What happens if I refinance a home equity loan?

If you refinance a home equity loan that was used for qualifying improvements, interest on the new loan remains deductible up to the remaining principal balance of the old loan, plus any additional amounts used for further improvements, as long as total debt does not exceed $750,000. Any cash-out portion spent on non-improvement purposes does not generate deductible interest.

Can I deduct interest on a home equity loan if I am self-employed and use the funds for my business?

Is home equity loan interest deductible in all states for state income tax purposes?

Most states that impose an income tax conform to federal itemized-deduction rules, so if you qualify for the deduction on your federal Schedule A, it typically flows through to your state return. A few states—California and New York, for example—have their own mortgage-interest deduction limits or add-back requirements.