HELOC interest is deductible on a 2026 federal return only when the proceeds went toward buying, building or substantially improving the home that secures the loan, only when total qualifying mortgage debt stays under $750,000 ($375,000 if married filing separately), and only when you itemize on Schedule A. Every other use is non-deductible. And the One Big Beautiful Bill Act, signed July 4, 2025, made these rules permanent.
The four-part test, in order:
- Use of funds: proceeds buy, build or substantially improve a qualified residence.
- Securing property: that residence is the same home the HELOC liens.
- Combined acquisition-debt cap of $750,000 ($375,000 MFS).
- You itemize on Schedule A.
What changed in 2025 (and what didn’t)
Before the 2025 law passed, the 2017 Tax Cuts and Jobs Act’s mortgage-interest rules were set to expire on December 31, 2025. That sunset would’ve restored the pre-2018 regime: a $1,000,000 acquisition-debt cap, a separate $100,000 home-equity interest deduction, and no use-of-funds test.
But the OBBBA killed that sunset.
So the $750,000 cap, the acquisition-debt-only rule, and the “buy, build or substantially improve” test are now permanent federal law for HELOC interest claimed on 2026 returns and after.
What the new law didn’t do: it didn’t bring back the standalone home-equity deduction. Interest on a HELOC used to consolidate credit cards, pay tuition, buy a car or cover medical bills isn’t deductible on a federal return – the same rule that’s been in force since 2018.
The four-part test every HELOC borrower must pass
1. Use of funds: buy, build or substantially improve
Worth knowing: the IRS defines “substantially improve” in Publication 936 as work that adds value to the home, prolongs its useful life or adapts it to new uses. Kitchen remodels, room additions, roof replacement, HVAC replacement, a new deck, finishing a basement and accessibility modifications all qualify. Routine repairs, repainting, swapping a broken dishwasher for an equivalent model and lawn care don’t.
The distinction tracks whether the work would be capitalized as an improvement under standard accounting treatment or expensed as maintenance. Painters and gardeners are maintenance. A general contractor pulling permits for a kitchen is improvement.
2. The HELOC must be secured by the home it improves
This trips up second-home owners constantly – usually after the renovation’s already paid for and the CPA delivers the bad news at filing time. If you take a HELOC on your primary residence and spend the money remodeling a vacation cabin, the interest isn’t deductible, even though both properties may be qualified residences. The lien and the improvement have to land on the same address. To deduct the interest, the HELOC would need to sit on the vacation home itself.
3. The $750,000 combined acquisition-debt cap
The cap applies across all acquisition debt on your primary and one designated second home, including the first mortgage and any qualifying HELOC or home equity loan balance. Married filing separately cuts the cap to $375,000. Loans originated on or before December 15, 2017 keep their pre-2018 cap of $1,000,000 ($500,000 MFS), but the use-of-funds test still applies to any draws taken after 2017.
4. You must itemize on Schedule A
And this is where the deduction quietly disappears for most borrowers. The standard deduction for tax year 2025 sits at roughly $15,000 single and $30,000 married filing jointly, with similar inflation-adjusted figures for 2026. To beat that, your itemized total of state and local taxes (capped under current law), first-mortgage interest, HELOC interest and charitable contributions has to clear the threshold. A household with a paid-off first mortgage and a small HELOC almost certainly takes the standard deduction and gets no benefit from the interest paid.
Deductible vs. non-deductible HELOC use cases
| HELOC use | Federal interest deduction |
|---|---|
| Kitchen or bath remodel on the securing home | Deductible |
| Room addition on the securing home | Deductible |
| New roof, HVAC or windows on the securing home | Deductible |
| Finishing a basement on the securing home | Deductible |
| Remodel of a different home you own | Not deductible |
| Credit card or personal-loan payoff | Not deductible |
| College tuition or student-loan payoff | Not deductible |
| Vehicle purchase | Not deductible |
| Medical bills | Not deductible |
| Stock, crypto or business investment | Not deductible under §163(h) |
| Down payment on a rental property | Not deductible as home-mortgage interest |
| Routine repairs and repainting | Not deductible |
Investment use sometimes qualifies under a separate regime – §163(d) investment-interest expense – with its own limits and forms. That’s a different deduction, not the home-mortgage interest deduction, and a CPA should run it.
Mixed-use HELOCs and the tracing rule
So what happens when half the money paid for a kitchen and half paid down credit cards? You allocate. When proceeds fund both qualifying and non-qualifying purposes, the interest has to be carved up by use, and the IRS expects borrowers to trace each draw (every single one) to a specific expenditure and prorate.
Here’s a worked illustration. A borrower opens an $80,000 HELOC and draws $50,000 for a kitchen remodel and $30,000 to pay off credit cards. Sixty-two and a half percent of the balance funds a qualifying improvement, so 62.5% of the annual HELOC interest is deductible. The remaining 37.5% is personal interest and isn’t deductible. This is an illustration of the rule, not tax advice.
Tracing gets harder over time as additional draws and partial paydowns layer on top of an existing allocation. Publication 936 contains the worksheets. The practical defense is treating the HELOC like a dedicated project account: pay contractors directly from the line, keep invoices tied to the draws that funded them, and avoid commingling non-improvement spending in the same account.
HELOC vs. cash-out refinance: same tax rule
The use-of-funds test applies identically to cash-out refinance proceeds. A $50,000 cash-out used for a kitchen remodel produces deductible interest on the $50,000 portion. The same $50,000 cash-out used to consolidate cards doesn’t. There’s no tax-treatment advantage to choosing one product over the other. The decision turns on rate, closing costs and whether the borrower wants to disturb a low-rate first mortgage. See our walkthrough of conventional cash-out refinance mechanics.
HELOC vs. home equity loan: same rule, simpler paperwork
A home equity loan delivers a lump sum, which makes tracing trivial: the full draw either qualifies or it doesn’t. A HELOC’s revolving draws complicate the audit trail. The federal rules are identical for both. Our deeper tax treatment of a fixed-rate second mortgage covers the product-level trade-offs.
Grandfathered HELOCs taken before December 16, 2017
A HELOC originated on or before December 15, 2017 keeps the pre-2018 $1,000,000 combined-acquisition cap ($500,000 MFS). But the grandfather only protects the cap (not the use rule). The use-of-funds requirement still governs any interest claimed for 2018 and later tax years. So a grandfathered HELOC drawn down in 2024 to pay tuition produces non-deductible interest.
Refinancing a grandfathered HELOC preserves the higher cap only up to the refinanced balance, and only if no new cash is added. Increase the principal and the new debt above the original balance is treated under the $750,000 regime. If HELOC subordination during a refinance is part of the plan, the same balance-preservation logic applies.
Documentation: what to keep
The lender reports total HELOC interest paid on Form 1098, box 1, regardless of how the borrower used the money. The deductible portion is the borrower’s job to compute and document. For audit defense, you’ll want contractor agreements and itemized invoices for each project, receipts for any materials you bought directly, bank or HELOC statements showing each draw alongside the payment that followed, as well as permits, inspection records and before-and-after photos for any substantial work.
Five years of records is a sensible floor (some preparers push for seven, and that’s not a bad instinct). The IRS statute of limitations on a return is generally three years from filing, six if the return understates income by more than 25%.
Reporting on the return
Form 1098 from the HELOC lender feeds Schedule A, line 8a. If the lender didn’t issue a 1098, the interest goes on line 8b. When only part of the balance is deductible, the borrower reports the qualifying portion, not the full amount on the 1098. The non-qualifying portion is omitted. No extra schedule attaches, but the allocation math stays in the file.
Frequently asked questions
Is HELOC interest deductible if I used it for debt consolidation? No. The proceeds didn’t buy, build or substantially improve the home. The interest is personal interest, which hasn’t been federally deductible since 1991.
Can I deduct HELOC interest used to remodel a vacation home? Only if the HELOC sits on that vacation home and the home counts as your qualified second residence. A HELOC against your primary residence funding work on a second home isn’t deductible.
Is interest on a HELOC used to buy a rental property deductible? Not as home-mortgage interest. The expense may shift to Schedule E as a rental business expense, which is a separate deduction with separate rules.
What about using a HELOC to invest in stocks or a business? Not deductible as home-mortgage interest. Investment use may produce a §163(d) investment-interest deduction with its own cap and forms, which is a CPA conversation.
Do I lose the deduction if I refinance my HELOC? No, as long as the refinanced balance still traces to qualifying improvement on the securing residence. A cash-out increase that goes to non-qualifying use isn’t deductible on the new portion.
Is HELOC interest deductible on my state return? It depends on the state. Some states conform to federal Schedule A, others apply their own caps or exclusions. Check your state’s instructions or ask a local preparer.
Did the 2025 tax law change anything for HELOCs I already have? No, it locked the existing rules in place. The interest you can deduct on a 2026 return is the same interest you could deduct on a 2024 return: the portion traceable to qualifying home improvement on the securing residence, within the combined-debt cap, if you itemize.
Bottom line
A HELOC buys you a tax break only when the money pays for work on the home that backs the loan, the total debt stays under the cap, and you already clear the standard deduction by itemizing. Outside that path, the interest is personal interest with no federal benefit. Keep contractor invoices, draw records and before-and-after photos for at least five years.
Consult a CPA or enrolled agent for your specific situation. Federal rules drive most of the analysis, but state treatment varies and individual facts matter.
