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If a good chunk of your net worth is tied up in real estate, it can be tricky to access money in a pinch. If you need cash, a home equity loan can give you access to money so you don’t have to resort to expensive credit card debt or personal loans.
Another perk of home equity loans is the potential to write off the interest paid to lower your tax bill. That said, you must meet a few rules and requirements to be eligible for this tax deduction.
Dig deeper: What is a home equity loan? A complete overview
In this article:
Is home equity loan interest tax deductible?
So can you deduct the interest paid on your home equity loan (HEL) when you file your taxes? It depends on how you use the money. According to the IRS, home equity loan interest can be tax deductible as long as you use the funds to "buy, build, or substantially improve” your home. However, you won't qualify for a tax deduction if you use the loan funds for other purposes, like paying off your student loans or medical debt.
Eligibility doesn’t just hinge on how taxpayers use the funds — it also depends on when you took out the loan and the total amount of your home debt. Keep reading for more information on the rules for deducting interest on home equity loans.
Learn more: Tax deduction vs. tax credit — What’s the difference?
Rules for the home equity loan interest tax deduction
The rules for home equity loan interest tax deductions changed after the Tax Cuts and Jobs Act (TCJA) took effect in late 2017. Here are the current rules under this act.
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For HELs taken out after Dec. 15, 2017: You’re allowed to deduct interest paid on up to $750,000 of home loans. If you’re married and filing separately, the limit goes down to $375,000. Remember that this cap applies to the total of all residential debt, including your first mortgage, home equity loans, and home equity lines of credit (HELOCs). Again, you can only deduct the interest on your HEL or HELOC if you used the money to “buy, build, or substantially improve” the property.
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For HELs taken out on or before Dec. 15, 2017: You can claim tax deductions on interest paid on up to $1 million of qualified residential debt, regardless of how you use the funds. If you’re married and filing separately, the limit is $500,000.
Note that your home equity loan, whether issued before or after TCJA took effect, must be secured by your first or second home to be eligible for interest tax deductions.
How the TCJA affects your home equity loan interest tax deduction
The Tax Cuts and Jobs Act can impact your tax deduction if you take out mortgage debt after Dec. 15, 2017.
Let’s say you bought a house in 2021 and currently have a mortgage balance of $720,000. Then, you took out a $75,000 home equity loan in 2023 to make significant home improvements. Since your combined total mortgage balance ($795,000) exceeds the $750,000 limit set by the TCJA, you can’t claim all interest paid on your home loans. However, you may deduct interest paid on the first $750,000.
It’s important to note that these rules set by the TCJA will expire on Dec. 31, 2025. In other words, if Congress does not pass new legislation, the interest deduction limits may revert to pre-TCJA levels in 2026.
Dig deeper: Mortgage interest tax deduction — How it works and when it makes sense
How to claim your home equity loan interest tax deduction
Here’s how to claim your home equity loan interest tax deduction and lower your tax bill to Uncle Sam.
Check your eligibility
Not every homeowner with a home equity loan is eligible to write off the interest they paid on it. The total amount of your mortgage debt, when you took out the home equity loan, and what you use the funds for can all affect your eligibility. To avoid any issues when tax season comes, review the TCJA rules above to see if your loan qualifies for a deduction. Contact a tax professional if you have any questions or concerns.
Decide whether itemizing makes financial sense
You must itemize your deductions to qualify for a home equity loan interest tax deduction instead of opting for the standardized tax deduction.
The standard deduction for the 2024 tax year (filed in 2025) is:
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Single filers and married couples filing separately: $14,600
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Heads of household: $21,900
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Married couples filing jointly: $29,200
Itemizing doesn’t always make financial sense, especially if the total of your itemized deductions is lower than the standard deduction for your filing status. However, if your itemized deductions are well above your standard deduction amount, it could be worth your time to claim home equity loan interest tax deductions.
Read more: How to decide between a standard and itemized tax deduction
Gather documents and receipts
Before filing an itemized return to claim the home equity loan interest tax deduction, make sure you have these documents handy:
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IRS Form 1098: This form details the mortgage interest you’ve paid during the tax year. You should receive this form from your lender before the tax season if you paid mortgage interest of $600 or more.
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IRS Form 1040: You’ll use this form to itemize your deductions. By submitting this document to the IRS, you're foregoing the standard deduction.
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Relevant receipts or bank statements: Have your receipts and bank statements handy to show how you used the funds from the home equity loan. You must use the money to build, buy, or make significant upgrades to your home to qualify for the deduction.
Home equity loan interest tax deduction FAQs
How do I report a home equity loan on my taxes?
To report a home equity loan on your taxes, you need IRS Form 1098 (Mortgage Interest Statement), which you’ll receive from your lender before it’s time to file your taxes. The form shows the interest you paid on your primary mortgage loan, home equity loan, home equity line of credit, and any other residential debt in the previous year. You’ll then itemize your deductions using IRS Form 1040.
How does a home equity loan affect your taxes?
A home equity loan can lower your tax bill since the interest you paid on it may be tax deductible. For home equity loans taken out after Dec. 15, 2017, and before 2026, the IRS lets you write off interest paid on up to $750,000 of qualified loans, or $375,000 if you’re married and filing separately — but there are rules about how you spend the funds. For qualified loans taken out on or before Dec. 15, 2017, you can deduct interest paid on a combined qualified mortgage debt balance of $1 million, or $500,000 if you’re married and filing separately.
Can you write off second mortgage interest?
Yes, the interest paid on your second mortgage may qualify for a tax deduction. Home equity loans and home equity lines of credit are two types of second mortgages. If you itemize your tax deductions, you can write off second mortgage interest as long as you use the funds to build or buy a house or to make major home improvements.
This article was edited by Laura Grace Tarpley.
