You’re sitting at your kitchen table, looking at a stack of receipts and a 1098 form from your lender. You used your Home Equity Line of Credit (HELOC) to finally gut that 1970s bathroom, but you also used a chunk of it to pay off that lingering credit card debt from the holidays. Now, you’re wondering: is heloc interest deductible?
Honestly, the answer isn’t a simple yes or no anymore. It’s more of a "maybe, if you followed the rules."
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The tax code changed significantly with the Tax Cuts and Jobs Act (TCJA). Before that, you could pretty much use your home like an ATM and deduct the interest regardless of where the money went. Those days are gone. Today, the IRS is much pickier. If you’re filing in 2026, you need to be very specific about how that money was spent, or you’ll leave money on the table—or worse, trigger an audit you aren't ready for.
The "Buy, Build, or Substantially Improve" Rule
This is the golden rule. According to the IRS, you can only deduct interest on a HELOC if the funds were used to buy, build, or substantially improve the home that secures the loan.
What does "substantially improve" actually mean? It’s not just fixing a leaky faucet.
Basically, the project has to add value to your home, prolong its useful life, or adapt it to a new use. Think of it as an investment in the structure itself. If you used the money to build a sunroom or replace a roof that was twenty years old, you're likely in the clear. If you used it to paint the guest room a trendy shade of sage green, the IRS considers that "maintenance," and that interest isn't deductible.
Real Examples of What Counts
- Deductible: Adding a second story, finishing a basement, or installing a central AC system where there wasn't one before.
- Not Deductible: Buying a new couch, paying for your kid’s tuition, or consolidating high-interest credit card debt.
- The Gray Area: Replacing a broken water heater might feel like an improvement, but if it's just a repair to keep things "as is," it usually doesn't qualify.
The $750,000 Cap (And Why It Matters)
There is a ceiling on how much debt you can actually deduct interest on. For most people filing jointly, the limit is $750,000. If you're married but filing separately, that drops to $375,000.
This isn't just $750,000 for your HELOC; it’s the total of your main mortgage and your HELOC combined. If your primary mortgage is $700,000 and you take out a $100,000 HELOC for a kitchen remodel, you’ve hit $800,000 in total debt. In this case, you can't deduct the interest on the full amount. You’d have to do some math to figure out the portion of interest that applies only to that first $750,000.
It gets even more "fun" if you bought your home before December 16, 2017. Those older mortgages are often "grandfathered" in at a higher $1 million limit. But if you add a new HELOC today, you’re still dancing with the newer, stricter $750,000 limit for the combined total.
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The Itemization Hurdle
Here is the kicker that trips up most homeowners: you can only deduct HELOC interest if you itemize your deductions on Schedule A of Form 1040.
Most people don't do this anymore.
Since the standard deduction was nearly doubled a few years ago, it's often higher than the sum of your individual deductions. For the 2025 tax year (the taxes you’re likely looking at right now in early 2026), the standard deduction for married couples filing jointly is $31,500. For single filers, it's $15,750.
If your total interest, state and local taxes (capped at $10k), and charitable donations don't add up to more than $31,500, then itemizing is a waste of time. You’d actually pay more in taxes just to claim that HELOC deduction. It’s a numbers game. You have to run the totals both ways to see which one saves you more.
Tracking Mixed-Use Loans
What happens if you used $20,000 of your HELOC for a new deck and $10,000 to pay off a car loan? This is what tax pros call a "mixed-use" loan.
The IRS doesn't disqualify the whole thing. Instead, you have to prorate it. You can only deduct the interest on the $20,000 used for the deck. This is where people get lazy and lose money. You need to keep a clear trail. If you just dump all the HELOC cash into your checking account and spend it randomly, proving to an auditor which dollar went where becomes a nightmare.
How to protect yourself:
- Keep every receipt. Even the small ones for hardware or permits.
- Save your bank statements. Highlight the transfers from the HELOC directly to contractors.
- Take photos. Before and after shots are surprisingly good evidence that a "substantial improvement" actually happened.
What's Changing in 2026?
We are currently in a bit of a transition period. Many of the rules from the 2017 TCJA are actually set to expire at the end of 2025 unless Congress acts. This means for the tax year 2026, we might see a return to the "old rules" where interest on up to $100,000 of home equity debt was deductible regardless of how you spent it.
However, as of right now, you have to play by the rules on the books. Don't assume the deduction is "automatic" just because you own a home.
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Actionable Next Steps
If you’re looking at your finances and trying to decide if you should claim this, start here:
- Total your debt: Add your current mortgage balance to your HELOC balance. If it's over $750,000, you’ll need to calculate a pro-rata deduction.
- Audit your spending: Go through your HELOC draws for the last year. Separate "improvements" from "repairs" and "personal spending."
- Run a "mock" Schedule A: Add up your property taxes (up to $10k), your primary mortgage interest, your HELOC interest (for improvements only), and your charitable gifts.
- Compare to the Standard Deduction: If your mock Schedule A is lower than $15,750 (single) or $31,500 (joint), skip the deduction and take the standard. It’s easier and cheaper.
- Consult a Pro: If you have a mixed-use loan or your debt is over the $750k cap, a CPA can help you with the specific ratio formulas required by IRS Publication 936.
The tax benefits of a HELOC are still there, but they require a lot more legwork than they used to. If you spent the money to make your home a better place to live, the IRS is usually willing to give you a break—just make sure you can prove it.