Are Home Equity Loans Tax Deductible?

What counts as a “substantial improvement”?

A substantial improvement is a capital improvement that adds to the home’s value, extends its useful life, or adapts it to a new use. Think of additions, new roofs, HVAC systems, kitchen renovations, bathroom remodels, accessibility upgrades, or solar installations. These projects are categorically different from routine maintenance and repairs.

Painting a room, fixing a leaky faucet, or replacing a broken window does not qualify. These are maintenance expenses, and interest on funds used to cover them is not deductible. The IRS draws a line: improvements that increase value or longevity are in; upkeep that merely preserves current value is out.

The IRS also requires that the improvement be made to the home securing the loan. You cannot borrow against your primary residence, improve a rental property, and claim the deduction. The collateral and the improved property must be the same.

Common uses that don’t qualify for the deduction

Many homeowners are surprised to learn how many popular uses of home equity loan proceeds disqualify the interest from being deducted. The rule is categorical: anything other than buying, building, or substantially improving the secured home fails the test.

• Debt consolidation: Using a home equity loan to pay off credit card balances, car loans, medical bills, or other consumer debt is one of the most common reasons homeowners borrow — and it is a non-qualifying use. The interest on those funds is not deductible. This is one of the most important things to understand about the post-TCJA landscape: debt consolidation, however financially reasonable it may be for a given borrower, does not carry the tax benefit.

• College tuition: Funding a child’s college education or your own professional development through a home equity loan may feel like a worthwhile investment, but the IRS does not treat it as a home improvement. The interest is not deductible. If the tax deduction matters to you, it may be worth comparing other education financing options, some of which carry their own deductibility provisions.

• Vacations, vehicles, personal expenses: Travel, cars, weddings, medical procedures, and everyday living expenses funded through home equity loans generate no deductible interest. These are personal expenditures in the eyes of the tax code.

• Investing in stocks or other property: Using your home equity to invest in the stock market or to purchase investment real estate does not qualify for the home mortgage interest deduction. Investment interest may be deductible under a separate provision (Form 4952), but that is a different rule with different limitations and should not be confused with the home equity interest deduction.

How to claim the deduction on your taxes

Claiming the home equity interest deduction is relatively straightforward if you meet the requirements — but it does require deliberate action. The deduction is not automatic.

Schedule A and itemizing vs. the standard deduction

The home equity interest deduction is an itemized deduction, which means you can only benefit from it if your total itemized deductions exceed the standard deduction for your filing status. As of the 2025 tax year, the standard deduction was approximately $15,750 for single filers and $31,500 for married couples filing jointly, and these amounts are adjusted annually for inflation. Check the current figure for your filing year, because it changes. If your mortgage interest, state and local taxes, charitable contributions, and other itemized deductions don’t collectively exceed your standard deduction, itemizing — and therefore the home equity interest deduction — provides no tax benefit.

This is a math problem many homeowners skip. Run the numbers before assuming the deduction is worth claiming.

Form 1098 from your lender

Your lender is required to send you a Form 1098 by January 31st each year. This form reports the mortgage interest you paid during the prior tax year. Box 1 shows total interest received; Box 2 shows the outstanding mortgage principal.

You’ll enter the qualifying interest on Schedule A (Form 1040). Use Line 8a for home mortgage interest that was reported to you on a Form 1098. Use Line 8b for deductible home mortgage interest that was not reported to you on a Form 1098 — for example, interest on a loan from an individual. (The distinction is about whether a 1098 was issued, not about how the funds were used.) The IRS Instructions for Schedule A detail exactly how to report home mortgage interest on your return.

If you have multiple loans or used a home equity loan for mixed purposes (partly qualifying, partly not), you will need to allocate the interest between deductible and non-deductible amounts. IRS Publication 936 explains how to allocate home mortgage interest in mixed-use situations, including the worksheets used to figure the deductible portion.

Recordkeeping requirements

Because the deductibility of home equity interest now hinges on how funds were used, your records must prove that use — not just that you borrowed the money and paid interest. Keep documentation related to the qualifying improvement: contractor invoices, permits, receipts, bank statements showing proceeds were paid to contractors or materials suppliers, and before-and-after photos if the project was significant.

If you are ever audited, the burden of proof generally rests with you. Thorough documentation is the evidence that separates a defensible deduction from a disallowed one.

HELOC interest deductibility: same rules, different product

A home equity line of credit (HELOC) is not a home equity loan — it’s a revolving credit line secured by your home — but the tax rules governing interest deductibility are the same. The same use-of-funds test applies. Draw money from your HELOC to install a new roof, and the interest on that draw may be deductible. Use the same HELOC to buy a car, and the interest is not.

One complication unique to HELOCs: the revolving nature of the product makes tracking use of funds more complex. If you use your HELOC for both qualifying and non-qualifying purposes, you must carefully allocate the interest between the two. The IRS requires taxpayers to trace proceeds to specific uses, and general “I paid interest on the full balance” accounting will not satisfy the requirement.

The Consumer Financial Protection Bureau provides plain-language overviews of how home equity products work, which can be a useful starting point before consulting a tax professional about your specific situation.

Home equity agreement tax treatment (it’s not a loan)

A home equity agreement (HEA) is a different type of product from a home equity loan or HELOC, and its tax treatment reflects that difference. An HEA is not a loan. It’s an arrangement in which an investor provides you a lump sum of cash today in exchange for a share of your home’s future value — that is, a portion of its future appreciation (or depreciation) — which is settled when you eventually sell or refinance.

HEA proceeds and how they’re generally treated

Because an HEA is generally not structured as a loan, the upfront payment you receive is typically not treated as taxable income when you receive it. Instead of repaying principal and interest in monthly installments, you settle the agreement at a future date — usually by selling the home or buying out the investor.

It’s important to weigh the other side of that structure. The absence of monthly payments does not mean the arrangement is free of cost or obligation. In exchange for the cash today, you are committing to give up a share of your home’s value at settlement, which can be a substantial amount if your home appreciates significantly. That future obligation is real and should be evaluated carefully against the alternatives.

The IRS has not issued comprehensive guidance specific to HEAs, and the tax treatment can depend on how a particular agreement is structured. Treat the general description above as a starting point, not a guarantee, and confirm the treatment of your specific agreement with a tax professional.

No interest to deduct

Because an HEA is generally not a loan and involves no interest payments, there is typically nothing to deduct. The home mortgage interest deduction does not apply to HEAs in the way it applies to home equity loans and HELOCs. If interest deductibility is a priority for you, a home equity loan or HELOC used for qualifying improvements may offer a tax deduction that an HEA does not.

How an HEA may affect cost basis at sale

When you sell your home and settle the HEA, the transaction can affect your tax picture. The payment you make to the investor to satisfy the agreement may reduce your net proceeds from the sale, which could in turn affect how much of any capital gain you realize. The tax treatment of HEA settlements at sale is a nuanced area, and IRS guidance continues to develop. Consulting a tax professional before entering into an HEA — particularly if you anticipate significant home appreciation — is strongly advisable.

Is itemizing worth it for home equity interest?

Whether the interest deduction actually saves you money depends on your total itemized deductions, not just your home equity interest. The deduction is only valuable if your itemized total clears the standard deduction threshold — and because the TCJA roughly doubled the standard deduction in 2018, fewer households itemize today than before.

The share of taxpayers who itemize dropped sharply after the TCJA took effect, because the larger standard deduction meant fewer households had itemized deductions that exceeded it. Whether itemizing makes sense for you depends in part on your state and local tax (SALT) deduction. The SALT deduction is capped, and that cap has changed: under the TCJA it was $10,000, and federal legislation in 2025 raised it substantially (with phase-outs for higher earners) and set it on a schedule that is expected to change again in later years. Because this figure moves, confirm the SALT cap that applies to your filing year before running your calculation.

To estimate whether itemizing is worthwhile, add your anticipated home equity interest to your mortgage interest, your SALT deduction (up to the applicable cap), charitable contributions, and any other allowable itemized deductions. If the sum exceeds your standard deduction, itemizing may make sense. If not, you’ll likely claim the standard deduction regardless of what your lender reports on Form 1098.

The key idea bears repeating: the tax deductibility of home equity loan interest depends on use of funds, not on the loan itself. Borrow thoughtfully, keep meticulous records, and consult a tax professional before making assumptions about your deduction eligibility.