HELOC Tax Deduction Rules (2025)
Under the Tax Cuts and Jobs Act (TCJA), HELOC interest is only deductible if the borrowed funds are used to "buy, build, or substantially improve" the home that secures the loan.
What Qualifies for Deduction
Deductible Uses (IRS Publication 936):
- Kitchen or bathroom remodeling
- Room additions or expansions
- New roof installation
- HVAC system replacement
- Foundation repairs
- Deck or patio construction
- Window or door replacement
- Plumbing or electrical upgrades
Non-Deductible Uses:
- Credit card debt consolidation
- Car purchases
- Vacations or personal expenses
- College tuition
- Business investments
- Medical bills
Deduction Limits
Current Limits (2025):
You can deduct interest on up to $750,000 of qualified home loans ($375,000 if married filing separately). This includes your first mortgage plus HELOC if used for home improvements.
Example:
First Mortgage: $500,000
HELOC for Kitchen Remodel: $75,000
Total Qualified Debt: $575,000 (under $750,000 limit)
Result: All HELOC interest is deductible
Calculating Your Tax Savings
Formula:
Annual HELOC Interest × Your Tax Bracket = Tax Savings
Example:
HELOC Balance: $50,000
Interest Rate: 8%
Annual Interest: $4,000
Tax Bracket: 24%
$4,000 × 0.24 = $960 tax savings
Effective Interest Rate: 6.08% (after tax benefit)
Documentation Requirements
To claim the deduction, you must:
- Keep receipts for all home improvement expenses
- Maintain contractor invoices and contracts
- Document how HELOC funds were used
- File Form 1098 (Mortgage Interest Statement)
- Itemize deductions on Schedule A
Standard Deduction vs. Itemizing
2025 Standard Deductions:
Single: $14,600
Married Filing Jointly: $29,200
You can only deduct HELOC interest if you itemize. If your total itemized deductions (mortgage interest + HELOC interest + property taxes + charitable donations) don't exceed the standard deduction, you won't benefit from the HELOC interest deduction.
State Tax Considerations
Some states follow federal rules, while others have different limits or don't allow HELOC interest deductions at all. Check your state's tax code or consult a tax professional.
Important Disclaimers
- This calculator provides estimates only
- Tax laws change frequently—consult IRS.gov for current rules
- Speak with a CPA or tax advisor for personalized advice
- Keep detailed records in case of IRS audit
- Mixed-use HELOCs (part improvement, part other) require allocation
Maximizing Your Deduction
- Use HELOC Only for Home Improvements: Simplifies documentation
- Keep Separate HELOC: Don't mix improvement funds with other uses
- Pay with HELOC Directly: Write checks from HELOC to contractors
- Document Everything: Photos, receipts, invoices, permits
- Consult Tax Pro: Ensure you're maximizing legitimate deductions
Official Tax Resources
Tax laws are complex. Review the official IRS publications for definitive guidance:
Expert Tips for Smart Borrowing
The 'Dollar Tracing' Rule
If you mix HELOC funds (e.g., buy a roof AND paid off a visa card), the IRS requires you to trace exactly which dollars went where. Suggestion: Keep the HELOC pure. Use it only for house stuff.
Check Standard Deduction
Don't obsess over this deduction unless your total interest, taxes, and charity exceed the Standard Deduction. If they don't, the tax benefit is zero.
Second Homes Count
You can deduct interest on a HELOC for a second home too, as long as you stay under the $750k total debt cap across both properties.
State Limits
Even if the IRS says yes, your state might say no. California, for example, has historically had different conformity rules for deductions.