Is Home Equity Loan Interest Tax-Deductible?

Interest on Home Equity Loans Is Sometimes Deductible

Image shows four icons of two homes, a home and a red check mark, a person wearing a hard hat holding a hammer, and a hand holding an envelope. They each have corresponding captions. Text reads: "Criteria for home equity loan tax deductions: Loan must be on 'first or second' home. Loan must be secured by your home. Possible to reduce costs on construction of a home. Per the IRS, 'both you and the lender must intend that the loan be repaid.'"
Photo:

The Balance / Derek Abella

Yes, the interest you pay on a home equity loan may be tax-deductible. It just depends on a few factors. The home mortgage interest deduction is the reason homeowners can deduct the interest they pay on a home equity loan.

A home equity loan is a type of loan that uses the equity in your home as collateral. If you use the proceeds of the loan for what the IRS deems to be "substantial improvements" to your home and meet other criteria, home equity loan interest may still be tax-deductible to an extent.

Understanding the potential and limits of the mortgage interest deduction can help you properly deduct home equity loan interest and reduce your tax bill.

Key Takeaways

  • The interest you pay on a home equity loan may be tax-deductible if you use the proceeds to make substantial changes to your home, the loan is secured by your first or second home, and you intend to repay the loan.
  • Home equity loan interest, home equity line of credit (HELOC) interest, and the interest you pay on a mortgage to purchase a new home are all tax-deductible if you meet the criteria.
  • A home equity loan may help you improve and update your home, but remember—your home is the collateral, so make sure you're able to repay it so you don't put yourself and your home at risk.

The Mortgage Interest Deduction and Home Equity Loans

Home equity loan interest tax deductions are one of the multiple mortgage-related interest tax deductions that you may be able to claim. A mortgage can help you buy a home or borrow against a property you already own in the case of a home equity loan. It might even provide some tax benefits since the interest you pay is sometimes deductible.

Under the home mortgage interest deduction, the IRS allows you to deduct the interest you pay on any type of home loan when it is secured by your main home or a second home, including:

  • Purchase loans (your primary mortgage when you borrow money to buy a house)
  • Home equity loans (often used as a second mortgage), which provide a lump sum of cash
  • Home equity lines of credit (HELOCs), which allow you to spend from a credit line

Note

You can only deduct interest on a home equity loan or home equity line of credit if the money is used to buy, build, or substantially improve the home against which the money was borrowed.

Deducting Home Equity Loan Interest on Your Taxes

Mortgage interest on a home equity loan is generally only tax-deductible when you meet certain conditions.

First or Second Home

The home mortgage interest deduction isn't for investors who own dozens of homes. To qualify, the loan must be for your first or second home. If you rent out a property, share it, or use it as an office, your deduction will be limited.

Loan Criteria

Your loan must be secured by your first or second home. This generally means your lender has a lien on your home and can foreclose on it if you fail to pay your loan.

Substantial Improvements

The interest you pay on your home equity loan is only deductible if you use the loan proceeds to "buy, build, or substantially improve" the home that secures the loan. For example, this means that you could take the mortgage interest deduction for a home equity loan you use to add a room to your home but can't take it if you use the loan proceeds to pay off credit card debt.

You Must Intend To Repay the Loan

The IRS states that “both you and the lender must intend that the loan be repaid.” This eliminates schemes such as using a sham transaction to save on taxes. For example, you can’t “borrow” from a family member, deduct the interest, and forget about the loan; the loan must function as a true arm’s length transaction.

Construction Loan

If you’re building a first or second home, you can still treat it as a qualified home for 24 months and take the mortgage interest deduction if it becomes a qualified home after construction is completed.

Note

If you’ve borrowed against your home equity, and you want to know how much interest you’ve paid so that you can deduct it, ask your lender. You should receive Form 1098 with details about the home equity loan interest you paid for the year.

Limits When Deducting Home Equity Loan Interest

Don’t rush to take out a loan just for savings at tax time. There are maximums and other limitations that might reduce or completely eliminate your ability to deduct the interest.

Dollar Amount

Generally, the dollar limit for the mortgage interest deduction is lower for loans that were taken out after 2017. If you use the money for another purpose (like higher education or debt consolidation), your deduction will be limited.

The mortgage interest you pay is fully deductible if you meet at least one of the following criteria:

  1. The loan was taken out on or before Oct. 13, 1987. This is known as “grandfathered” debt.
  2. The loan was taken out after Oct. 13, 1987, but before Dec. 16, 2017, and was used to buy, build, or improve your home, and the total amount of debt (not interest) is $1 million or less.
  3. The debt was taken out after Dec. 16, 2017, and was used to buy, build, or improve your home, and the total amount of debt is $750,000 or less.

Note

If you're not sure whether your tax deduction is limited to the amount of mortgage interest up to your qualified loan limit, you can calculate using Table 1 in Publication 936.

Itemizing Deductions

The mortgage interest deduction is only available if you itemize your deductions, which many people don’t do. If you’re not sure whether you itemize, see if you’ve filed Schedule A of Form 1040.

It’s typically best to take the largest deduction available. If your standard deduction is considerably more than you’d get from itemizing, then itemizing for the sake of deducting mortgage interest costs might not offer any tax benefits. To get more than your standard deduction, you might need a sizable loan or other expenses to help (such as high medical expenses, for example).

Deduction vs. Credit

Some people confuse tax deductions with tax credits. A tax deduction helps to lower the amount of income used to calculate your tax bill. A tax credit is a dollar-for-dollar reduction in what you owe on your tax bill. The mortgage interest deduction will help lower your taxable income but it's not as powerful as other tax credits.

Note

Any interest that is accrued on a reverse mortgage is not tax-deductible.

Should You Deduct Home Equity Loan Interest?

Under the home mortgage interest deduction, the home equity loan interest you pay is tax-deductible in certain cases. You just need to make sure you use the loan proceeds to make improvements to your house. A home equity loan is not meant to just help you save money on your taxes.

Home equity loans can also be risky because using your home as collateral when you take out a second mortgage means that a lender can foreclose on your home if you don't make the payments.

Claiming the mortgage interest deduction improperly can also lead to tax penalties from the IRS, so verify all of the details about your situation by reading IRS Publication 936.

And remember, tax laws frequently change. Speaking with someone you trust who is familiar with the details of your home equity loan and taxes can help you avoid any problems when taking this tax deduction.

Frequently Asked Questions (FAQs)

When is home equity loan interest not tax-deductible?

According to the IRS, interest on home equity loans or home equity lines of credit is not tax-deductible if the borrowed amount is not used to buy, build, or substantially improve the home against which the money was borrowed. It's also not tax-deductible if the loan amount is more than a certain amount.

On what tax form can you deduct home equity loan interest?

You should receive IRS Form 1098 from your home loan lender with details about the interest you've paid on your home equity loan. You need to report that info on line 8a of Schedule A (Form 1040) which is used when you itemize your tax deductions. Any interest paid on a home equity loan that is not tax-deductible needs to be reported on line 8b.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Consumer Financial Protection Bureau. "What Is a Home Equity Loan?"

  2. IRS. "Publication 936, Home Mortgage Interest Deduction."

  3. IRS. "LB&I International Practice Service Transaction Unit," Page 3.

  4. IRS. "About Schedule A (Form 1040), Itemized Deductions."

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