IRS Rules on Home Equity Loan Interest Deductions

Last updated 10/01/2025 by

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Summary:

Home equity loan (HEL) interest is deductible only if the proceeds are used to buy, build, or substantially improve the home that secures the loan, you itemize deductions, and your mortgage debt falls within IRS limits. Interest on funds used for personal expenses (e.g., credit cards, vacations) is not deductible. Keep detailed records showing how you used the money.

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What the IRS Allows (and Disallows)

The IRS treats HEL interest as deductible “home mortgage interest” only when the borrowed funds are used to buy, build, or substantially improve the home that secures the loan (your main home or, if applicable, a qualified second home).

Eligible uses (deductible interest): Kitchen/bath remodels, roof replacement, room additions, structural repairs, major systems (HVAC, plumbing, electrical), energy-efficiency improvements, and capital improvements that add value or extend useful life.
Ineligible uses (not deductible): Debt consolidation (credit cards, auto loans), tuition, medical bills, vacations, general consumer purchases, or improvements to a property that does not secure the loan.

Debt Limits & Which Home Qualifies

Debt caps: Mortgage interest deductibility is subject to IRS limits on the total amount of acquisition debt across your qualifying homes (see current thresholds in IRS Publication 936). Amounts above the cap do not accrue deductible interest.
Which home: Interest is deductible only if the HEL is secured by the same home you improved (main home or a qualified second home you choose to treat as such for the year).
Rental or investment property: Different rules may apply; interest may be deductible as a business/rental expense if proceeds are used for that property and properly traced—consult a tax professional.

Tracing Rules: Mixed-Use Borrowing

If you split HEL funds between eligible and ineligible purposes, you must “trace” how the money was used and allocate interest accordingly. Only the portion used to buy/build/improve the secured home generates deductible interest.

Keep a separate account or document a clear paper trail (closing statement, contractor invoices, permits, bank transfers).
If 70% of proceeds funded eligible improvements and 30% paid personal debt, then typically 70% of interest may be deductible (subject to overall IRS limits and itemizing).

Refinances, Second Loans, and HELOCs

HEL vs HELOC: The same “buy, build, or substantially improve” rule applies to home equity loans and lines. The label doesn’t matter—how you use the money does.
Refinancing a HEL: Interest on a refinance of acquisition/improvement debt generally remains deductible (up to limits). Additional cash-out used for non-eligible purposes won’t generate deductible interest.
Second homes: If your HEL is secured by your second home and used to improve that second home, interest may be deductible (limits apply). You can’t deduct HEL interest secured by one property to improve a different property.

Itemizing vs Standard Deduction

You can deduct mortgage interest only if you itemize on Schedule A. If your standard deduction is larger than your itemized deductions, you won’t see a tax benefit from HEL interest—even if the use qualifies.

Examples: How the Deduction Works

Scenario	Use of HEL Funds	Deductible?	Notes
Kitchen remodel on main home	Cabinetry, electrical, permits	Yes	Qualifies as substantial improvement; subject to IRS debt limits & itemizing
Debt consolidation	Pay off credit cards	No	Personal use—interest not deductible
Mixed use	70% bathroom addition; 30% tuition	Partially	Trace and allocate interest (e.g., 70% potentially deductible)
Improve second home secured by HEL	Roof replacement on the second home	Yes	If the HEL is secured by that second home and within limits
Improve rental property with HEL on main home	New HVAC at rental	Not as personal mortgage interest	May be deductible as rental expense if properly traced and documented

Recordkeeping: What to Save

Closing disclosure & loan documents (to show the debt is secured by the home)
Invoices, contracts, permits, and receipts for eligible improvements
Bank statements showing funds flow from HEL to improvement payments
Year-end Form 1098 from the lender reporting mortgage interest paid

Tip: Store documents digitally with clear labels and dates (e.g., “2025-03 Roof Permit.pdf”).

FAQs

Is HEL interest deductible if I used the funds for a car or vacation?

No. Personal-use spending does not qualify.

What if I used a HEL to finish a basement and later refinanced it?

Interest on the portion of the refinanced debt that remains acquisition/improvement debt may continue to be deductible (subject to limits).

Does the $10,000 SALT cap affect mortgage interest?

SALT limitations don’t reduce mortgage interest directly, but they can affect whether itemizing makes sense for you overall.

Key Takeaways

HEL interest is deductible only when funds are used to buy, build, or substantially improve the home securing the loan.
You must itemize deductions and stay within IRS mortgage debt limits.
Mixed-use borrowing requires tracing and partial allocation of interest.
Maintain thorough records to substantiate eligible improvements.

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Bottom Line

The deductibility of HEL interest depends on how you use the money. Use funds to buy, build, or substantially improve the home that secures the loan, keep meticulous records, and confirm current IRS limits in Publication 936—or consult a qualified tax professional for your situation.

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