Home Equity Loan Tax Deduction Rules 2026: What Interest Is Deductible?

Under the Tax Cuts and Jobs Act (TCJA), home equity loan and HELOC interest is tax deductible in 2026 only if the borrowed funds are used to buy, build, or substantially improve the home that secures the loan. Using home equity for debt consolidation, car purchases, vacations, or any other personal expense means the interest is not deductible. The combined mortgage debt limit for the deduction is $750,000 ($375,000 married filing separately). These rules have applied since 2018 and remain in effect for the 2026 tax year. Homeowners must track fund usage and keep documentation to support their deduction if audited.

Important Disclaimer

This article is for general educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex, subject to change, and individual circumstances vary significantly. Numerical examples are simplified illustrations and should not be used for tax planning without professional guidance. Always consult with a qualified tax professional (CPA, enrolled agent, or tax attorney) before making decisions based on potential tax deductions. Mo Abdel and Lumin Lending are mortgage professionals, not tax advisors, and do not provide tax advice.

From My Practice: The Tax Question Every Borrower Asks

"Is this deductible?" is the single most common question I hear from home equity borrowers. Since the TCJA changed the rules in 2018, there has been widespread confusion about what qualifies and what does not. I have seen borrowers assume all home equity interest is deductible (it is not) and others assume none of it is (also incorrect). The truth depends entirely on how you use the money. I make sure every client is aware of these general rules before they close, and I always recommend they confirm the specific tax treatment with their CPA or tax attorney. — Mo Abdel, NMLS #1426884

TCJA Rules: What Changed for Home Equity Tax Deductions

The Tax Cuts and Jobs Act, signed into law on December 22, 2017 and effective for tax years 2018 through 2025, fundamentally changed the rules for deducting home equity loan and HELOC interest. The TCJA's individual provisions were originally set to sunset after December 31, 2025. As of February 2026, Congress has not enacted final legislation addressing these provisions, so the rules described below reflect the TCJA framework that has been in effect since 2018. Check with your tax professional for the latest legislative status, as this area is subject to change.

Before TCJA (Pre-2018 Rules)

Home equity interest deductible regardless of use—debt consolidation, vacations, cars, anything
Home equity debt limit: $100,000 ($50,000 MFS)
Acquisition debt limit: $1,000,000 ($500,000 MFS)
Two separate categories of deductible mortgage interest

After TCJA (2018-2026 Rules)

Home equity interest deductible ONLY if used to buy, build, or substantially improve the home
No separate home equity debt category—all qualified mortgage debt is treated the same
Combined debt limit: $750,000 ($375,000 MFS) for all acquisition and improvement debt
Personal use of home equity funds = no deduction

Key IRS Clarification

In IRS Advisory IR-2018-32 (February 2018), the IRS explicitly confirmed: "Interest on home equity loans and lines of credit is still deductible under the new law if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan." The name of the loan does not matter—what matters is how the funds are used.

Deductible vs Non-Deductible Uses: Complete Comparison

The critical question is not what type of loan you have—it is what you do with the money. The same HELOC can generate deductible or non-deductible interest depending entirely on fund usage.

Use of Funds	Tax Deductible?	Category
Kitchen remodel	Yes	Substantial improvement
Bathroom renovation	Yes	Substantial improvement
Room addition	Yes	Substantial improvement
New roof	Yes	Substantial improvement
HVAC system replacement	Yes	Substantial improvement
Swimming pool installation	Yes	Substantial improvement
Solar panel installation	Yes	Substantial improvement (+ separate solar credit)
ADU / guest house construction	Yes	Substantial improvement / building
Credit card debt consolidation	No	Personal use
Student loan payoff	No	Personal use
Car purchase	No	Personal use
Vacation / travel	No	Personal use
Wedding expenses	No	Personal use
Medical bills	No	Personal use (may qualify under medical deduction separately)
Business investment	No*	Not home improvement (*may be deductible as business expense)
Down payment on investment property	No*	Not improvement to securing home (*tracing rules may apply)

*Some uses may be deductible under different tax code provisions (e.g., business interest deduction, investment interest deduction) but not as mortgage interest. Consult a tax professional.

The $750,000 Combined Debt Limit Explained

The TCJA established a single combined limit for all qualified mortgage debt, replacing the previous two-tier system. Understanding this limit is essential for homeowners with significant mortgage balances.

How the Limit Works

Filing Status	2026 Combined Limit	Grandfathered Limit (Pre-12/15/2017)
Married Filing Jointly	$750,000	$1,000,000
Single	$750,000	$1,000,000
Married Filing Separately	$375,000	$500,000
Head of Household	$750,000	$1,000,000

Calculating Your Deductible Interest

The limit applies to the total combined balance of all mortgages on your primary residence and one second home. Here is how to determine if you are within the limit:

Add up all mortgage balances: First mortgage + home equity loan + HELOC + any other mortgage debt on qualifying homes
Compare to the limit: If total is $750,000 or less, all qualifying interest is deductible
If over the limit: Prorate the deduction. Divide $750,000 by your total mortgage debt to determine the deductible percentage

Simplified Example: Over-Limit Proration

This is a simplified illustration. Your CPA should run these numbers for your specific situation, as additional factors may apply.

Hypothetical Scenario:

First mortgage balance: $600,000
HELOC balance (used for kitchen remodel): $200,000
Total qualified mortgage debt: $800,000
Combined limit: $750,000

General Concept:

Deductible ratio: $750,000 / $800,000 = 93.75%
If total interest paid = $48,000
Deductible interest: $48,000 x 93.75% = $45,000
Non-deductible interest: $48,000 x 6.25% = $3,000

Grandfathering Rules for Pre-December 2017 Mortgages

If your first mortgage was originated before December 15, 2017, it is grandfathered under the higher $1,000,000 limit. However, any new home equity debt taken after December 15, 2017 falls under the $750,000 combined limit. The interaction between grandfathered and non-grandfathered debt can be complex—this is an area where professional tax advice is essential.

What Qualifies as a "Substantial Improvement" Under IRS Rules

The IRS uses the phrase "buy, build, or substantially improve" to define qualifying uses. The "substantially improve" standard comes from IRC Section 163(h)(3) and has been interpreted through IRS guidance and court cases.

Improvements That Qualify

Additions: Room additions, garage construction, deck/patio enclosures, ADU/guest house
Major remodels: Kitchen renovation, bathroom overhaul, basement finishing
Structural work: Foundation repair, new roofing, structural reinforcement
Systems replacement: New HVAC, electrical rewiring, plumbing overhaul, new windows
Energy improvements: Solar panels, insulation upgrade, energy-efficient windows
Exterior upgrades: New siding, significant landscaping, driveway replacement, fencing
Accessibility modifications: ADA-compliant modifications, wheelchair ramps, widened doorways
Safety upgrades: Earthquake retrofitting, fire sprinkler installation, security systems

Work That Generally Does NOT Qualify

Routine maintenance: Painting (unless part of larger renovation), gutter cleaning, lawn care
Minor repairs: Fixing a leaky faucet, replacing a broken window pane, patching drywall
Appliance replacement: Replacing a dishwasher or refrigerator (unless part of a kitchen remodel)
Furniture and decor: New furniture, window treatments, artwork
Cleaning services: House cleaning, carpet cleaning, pest control

The Gray Area

Some improvements fall in a gray area. For example, replacing all flooring throughout the home is likely a substantial improvement, while replacing flooring in one room may or may not qualify depending on the scope and cost. The IRS looks at whether the work adds value, prolongs useful life, or adapts the property to new uses. When in doubt, document everything and consult your CPA before claiming the deduction.

How to Track and Document Home Equity Fund Usage

Proper documentation is important for supporting any tax deduction claim. Tax professionals generally recommend that borrowers keep records for at least three years after filing (the IRS standard audit window). Here are the documentation practices that CPAs commonly recommend:

Step 1: Separate the Money

Open a dedicated bank account for home equity proceeds
Deposit all loan funds into this dedicated account
Pay all improvement expenses directly from this account
Do not co-mingle with personal funds or regular checking

Step 2: Document Everything

Contractor contracts: Written agreements with scope of work and payment terms
Invoices and receipts: Every payment to contractors, suppliers, and vendors
Building permits: Copies of all permits pulled for the project
Inspection reports: City/county inspection results
Before and after photos: Visual documentation of the improvement
Bank statements: Showing funds flowing from home equity account to improvement expenses
Material receipts: For DIY projects, keep all material purchase receipts

Step 3: Work With Your CPA on the Deductible Portion

Your CPA or tax professional will use your documentation to calculate the deductible portion of your interest. The general concept involves:

Total home equity interest paid (from Form 1098)
Percentage used for qualifying improvements (total improvement spend / total draws)
Deductible interest = Total interest x Qualifying percentage
Keep your calculation with your tax records

Note: This is a simplified overview. Your tax professional should perform the actual calculations, as individual circumstances—including the timing of draws, repayments, and the interaction with other deductions—can affect the result.

Why Dedicated Accounts Matter: IRS Tracing Rules

The IRS uses "tracing rules" (Treasury Regulation 1.163-8T) to determine the character of interest based on how borrowed funds are actually used. If you co-mingle home equity funds with personal spending, the IRS can trace each dollar to determine what qualifies. The dedicated account approach described above simplifies this significantly. The tracing rules are technically complex—ask your CPA or tax attorney if you have any questions about how they apply to your situation.

Mixed-Use Scenarios: Calculating Partial Deductions

Many borrowers use home equity for a combination of qualifying and non-qualifying purposes. When this happens, you must allocate the interest proportionally.

Mixed-Use Allocation: Simplified Illustrations

These examples show the general concept of proration. Actual calculations depend on your specific circumstances—consult your CPA before claiming any deduction.

Scenario	Total Borrowed	Qualifying Use	Non-Qualifying	Deductible %
Kitchen + debt payoff	$100,000	$70K (kitchen)	$30K (credit cards)	70%
Addition + car + vacation	$150,000	$120K (addition)	$30K (car + vacation)	80%
Roof + solar + medical	$80,000	$65K (roof + solar)	$15K (medical bills)	81.25%
100% renovation	$200,000	$200K (full remodel)	$0	100%
100% debt consolidation	$50,000	$0	$50K (all personal)	0%

HELOC Draw-by-Draw Tracking

HELOCs present a unique tracking challenge because you make multiple draws over time. Your CPA will need records showing how each draw was used. Good documentation habits include:

Record every HELOC draw with date, amount, and purpose
Match each draw to specific improvement invoices or personal use
Provide these records to your CPA so they can determine the deductible percentage
Update your records annually as the mix of draws and repayments changes

The weighted-average calculation for HELOC interest allocation can be complex. This is an area where professional tax guidance is particularly valuable.

Cash-Out Refinance Tax Deduction Rules

Cash-out refinances follow the same use-based rules as home equity loans and HELOCs. The interest deductibility depends on how the cash-out proceeds are used—not on the loan type.

Two Components of a Cash-Out Refinance

Refinance portion: The amount that pays off your existing mortgage. Interest on this portion is deductible as acquisition debt (the original mortgage was used to buy the home)
Cash-out portion: The additional amount above your existing mortgage balance. Interest on this portion is deductible only if used to buy, build, or substantially improve the home

Cash-Out Refinance Deduction Example

Simplified illustration—your CPA should confirm the deductible amounts for your specific situation.

Hypothetical Scenario:

Existing mortgage balance: $400,000
New cash-out refinance: $550,000
Cash-out amount: $150,000
$100,000 used for whole-home renovation
$50,000 used for debt consolidation

Deductible Interest Calculation:

Refinance portion ($400,000): 100% deductible (acquisition debt)
Cash-out for renovation ($100,000): 100% deductible (substantial improvement)
Cash-out for debt consolidation ($50,000): Not deductible (personal use)
Total deductible debt: $500,000 of $550,000 = 90.9% of interest is deductible

Broker's Perspective

When clients plan to use some funds for improvements and some for personal use, I always suggest they discuss the documentation approach with their CPA first. Many borrowers find it helpful to keep improvement funds separate—some opt for a smaller cash-out limited to the improvement amount and use a separate HELOC for personal needs. Your tax professional can advise on the best approach for your situation. — Mo Abdel, NMLS #1426884

Tax Deduction Data Hub: 2026 Numbers

Data Point	2026 Value	Notes
Combined mortgage debt limit (MFJ)	$750,000	TCJA limit, pending legislative update
Combined limit (MFS)	$375,000	Half of MFJ limit
Grandfathered limit (pre-12/15/2017)	$1,000,000	For mortgages originated before cutoff
Standard deduction (Single)	~$15,700*	*Projected—confirm with IRS or your CPA
Standard deduction (MFJ)	~$31,400*	*Projected—confirm with IRS or your CPA
SALT deduction cap	$10,000	State/local tax deduction limit
IRS guidance reference	IR-2018-32	Key IRS advisory on home equity deductions
Tax code section	IRC 163(h)(3)	Qualified residence interest provision
Tracing regulation	Treas. Reg. 1.163-8T	Interest tracing rules for mixed-use debt

Extended FAQ: Home Equity Tax Deduction Questions

Is home equity loan interest tax deductible in 2026?

Yes, but only if the loan funds are used to buy, build, or substantially improve the home that secures the loan. Under the Tax Cuts and Jobs Act (TCJA), interest on home equity debt used for other purposes—such as debt consolidation, vacations, or personal expenses—is not deductible. The TCJA provisions apply through tax year 2025, and are expected to remain in effect for 2026 unless Congress passes new legislation.

What is the maximum mortgage debt for the interest deduction in 2026?

The combined limit for all mortgage debt (first mortgage plus home equity loans/HELOCs) is $750,000 for married couples filing jointly and single filers, or $375,000 for married filing separately. For mortgages originated before December 15, 2017, the higher $1 million limit ($500,000 MFS) may still apply under grandfathering rules.

Can I deduct HELOC interest used for debt consolidation?

No. Under current TCJA rules, HELOC interest used for debt consolidation is not tax deductible. The interest is only deductible if the HELOC funds are used to buy, build, or substantially improve the home securing the loan. If you use HELOC funds to pay off credit cards, student loans, medical bills, or other non-housing debts, that interest provides no tax benefit.

What counts as a "substantial improvement" for the tax deduction?

A substantial improvement is a renovation or addition that adds value to the home, prolongs its useful life, or adapts it to new uses. Examples include kitchen or bathroom remodels, room additions, new roofing, HVAC replacement, adding a swimming pool, or significant landscaping. Routine maintenance and repairs—such as painting, fixing leaks, or replacing broken fixtures—generally do not qualify as substantial improvements.

Do I need to track how I spend my home equity loan funds?

Yes. The IRS requires that you be able to demonstrate the funds were used for qualifying purposes. Best practice is to deposit home equity loan proceeds into a separate, dedicated bank account and pay all improvement-related expenses directly from that account. Keep all receipts, contractor invoices, permits, and before/after documentation. This paper trail is essential if the IRS audits your deduction.

Can I deduct interest on a home equity loan for a second home?

Yes. The mortgage interest deduction applies to your primary residence and one second home (vacation home). If you use a home equity loan or HELOC secured by your second home to improve that same second home, the interest is deductible—subject to the same $750,000 combined debt limit across all properties. The funds must be used to improve the specific home that secures the loan.

What happens if I use home equity funds for both improvements and personal use?

If you use home equity loan proceeds for a mix of qualifying and non-qualifying purposes, you must allocate the interest proportionally. Only the portion of interest attributable to the qualifying use (buy, build, or substantially improve) is deductible. For example, if you borrow $100,000 and use $70,000 for a kitchen remodel and $30,000 for debt consolidation, only 70% of the annual interest is deductible.

Is cash-out refinance interest tax deductible?

The same rules apply to cash-out refinance proceeds as to home equity loans. The interest on the cash-out portion is deductible only if the funds are used to buy, build, or substantially improve the home. Interest on the portion that refinances your existing mortgage balance remains deductible regardless of how original proceeds were used, as it is acquisition debt.

Will the TCJA home equity rules change after 2025?

The TCJA provisions are currently set to expire after December 31, 2025, which would restore the pre-2018 rules allowing deduction of home equity interest regardless of use (up to $100,000). However, Congress may extend, modify, or make the TCJA rules permanent. As of February 2026, no final legislation has been enacted. Consult a tax professional for the latest status and plan accordingly.

Do I report home equity loan interest on my tax return?

Yes. Your lender provides Form 1098 (Mortgage Interest Statement) showing the interest paid during the tax year. You report deductible mortgage interest on Schedule A (Itemized Deductions) of your federal tax return. You must itemize deductions to claim the mortgage interest deduction—it is not available if you take the standard deduction. Check IRS.gov or consult your CPA for the current standard deduction amounts.

Can I deduct home equity interest if I take the standard deduction?

No. The mortgage interest deduction is an itemized deduction. You must file Schedule A and choose to itemize deductions instead of taking the standard deduction. You should only itemize if your total itemized deductions (including mortgage interest, state/local taxes, charitable contributions, etc.) exceed the standard deduction amount. Check IRS.gov or consult your CPA for the current standard deduction thresholds.

What documentation does the IRS require for the home equity interest deduction?

The IRS may require: (1) Form 1098 from your lender showing interest paid, (2) loan closing documents showing the loan amount and terms, (3) evidence of how funds were used (contractor invoices, receipts, permits, bank statements), (4) appraisals or estimates showing the improvement increased home value, and (5) records showing the improvement was to the property securing the loan. Keep these records for at least 3 years after filing.

Expert Summary: Maximizing Your Home Equity Tax Benefits

Key Takeaways for Homeowners

Interest is deductible only for buy, build, or substantially improve—debt consolidation and personal use do not qualify
The $750,000 combined limit covers all mortgage debt on your primary and one second home
Track every dollar with a dedicated bank account and complete documentation
Mixed-use requires proration—only the qualifying percentage of interest is deductible
You must itemize on Schedule A to claim the deduction—check IRS.gov for the current standard deduction threshold
Cash-out refinances follow the same rules—the refinance portion is acquisition debt; the cash-out portion depends on use
The loan name does not matter—HELOC, home equity loan, and cash-out refinance are all treated the same by the IRS
Always consult a CPA—these are general rules and individual situations vary significantly

Explore Your Home Equity Options

I help homeowners understand their home equity options—whether that is a HELOC, home equity loan, or cash-out refinance. I walk every client through the available products and always recommend connecting with a CPA or tax attorney to confirm the tax treatment for your specific situation.

Call Mo Abdel: (949) 822-9662

NMLS #1426884 | Lumin Lending NMLS #2716106

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