Now that tax season is over, a lot of people are looking for ways to save money on their taxes. The way home equity loans are taxed is an area that often confuses. These loans can help you with your money, but are they tax-deductible? In short, the answer is yes, but only after certain events.
Understanding the nuances of home equity loan deductions is crucial, especially as homeowners increasingly turn to these loans for funding renovations or major home improvements. This post breaks down the current IRS rules, explores what qualifies for a deduction, and offers guidance for those looking to take advantage of the potential tax benefits.
Are Home Equity Loans Tax Deductible?
Homeowners often look to home equity loans for major expenses, but many wonder whether the interest on these loans can ease their tax burden. The deductibility of this interest depends entirely on how the funds are used and whether they meet specific IRS guidelines.
The IRS Rules
The deductibility of home equity loan interest changed significantly under the Tax Cuts and Jobs Act of 2017. Many assumed this change eliminated the ability to deduct interest on these loans entirely. In reality, the IRS still allows deductions, but only under certain conditions.
To qualify, the borrowed funds must be used to buy, build, or substantially improve the home that secures the loan. The IRS is clear on this point: general or unrelated spending will not qualify. That means if the funds were used for home improvement projects that significantly increase the home’s value or functionality, the interest on that loan may still be deductible.
What Qualifies for a Deduction?
Deductibility depends entirely on how the loan proceeds are used. Homeowners may be eligible for an interest deduction if they used their loan to finance substantial renovations or home improvement projects. These projects might include remodeling a kitchen, adding a new room or extension, or making structural upgrades such as installing a new roof or energy-efficient windows.
The IRS considers these improvements as qualifying because they enhance or extend the home’s value or usability. A project that transforms the home’s condition or function often meets the IRS’s standard for substantial improvement.
What Does Not Qualify?
Conversely, interest on a home equity loan is not deductible if the loan proceeds are used for expenses unrelated to the property’s acquisition or improvement. Non-qualifying uses include:
- Paying off credit card or student loan debt
- Financing a vacation or vehicle purchase
- Covering daily household expenses
- Making minor repairs (e.g., fixing a leaking pipe or replacing a faucet)
If the borrowed funds are used for these non-qualifying purposes, the interest cannot be deducted from taxable income, regardless of the loan amount or structure.
How Much Can Be Deducted?
Even if the use of the loan meets IRS qualifications, there are limits to how much interest can be deducted. Taxpayers can deduct interest on a combined total of up to $750,000 in qualified residence loans. It includes both the primary mortgage and any home equity loans or HELOCs.
For example, suppose a homeowner has a $600,000 mortgage and takes out a $100,000 home equity loan used to remodel their home. In that case, the interest on both loans may be fully deductible—assuming the total loan amount stays under the $750,000 cap. It’s important to note that only the interest portion of the loan payments is deductible. The principal repayment is not eligible for any tax deduction.
The Importance of Documentation
The IRS requires clear documentation to support any deduction claimed for home equity loan interest. Homeowners should maintain detailed records that show exactly how the loan funds were used. It includes receipts, contracts, invoices, and before-and-after evidence of completed improvements.
In the event of an audit, these records are crucial. They help establish that the loan was used for a qualified purpose and that the interest deduction is legitimate under current tax law. Without proper documentation, even eligible deductions may be denied.
Consulting a Tax Professional
Because the rules surrounding home equity loan interest deductions are complex and can change over time, many homeowners turn to tax professionals for guidance. A qualified tax advisor can help determine whether a specific loan use qualifies, calculate the deductible amount, and ensure compliance with all IRS requirements.
This expert insight is especially valuable for homeowners dealing with multiple loans, large renovation projects, or unclear documentation. With professional assistance, the risk of errors or missed deductions is significantly reduced. Additionally, a tax professional can help homeowners stay updated on any new IRS changes that could impact future deductions.
Why Does Proper Use of Home Equity Funds Matter in 2025?
In 2025, the IRS continues to emphasize that how you use your home equity loan determines whether the interest is tax deductible. Simply having a home equity loan does not guarantee a deduction. Funds must directly support buying, building, or substantially improving the property tied to the loan.
If used improperly—for example, to cover personal expenses—the deduction is disallowed, even if your home secures the loan. Homeowners should plan carefully and track expenses to maximize their tax benefits under current IRS rules. Failing to use the loan correctly can not only forfeit the deduction but may also trigger additional tax liabilities during an audit.
Conclusion
Home equity loans can be tax deductible, but only when the borrowed funds are used specifically to buy, build, or substantially improve the home that secures the loan. The deduction applies solely to the interest paid, not the principal, and only if the use aligns with IRS guidelines.
Projects that add value or extend the home’s functionality typically qualify, while personal expenses or minor repairs do not. Proper documentation is essential to support any deduction claims. Homeowners should be mindful of the $750,000 loan cap for qualified residence interest.
