Home equity loans and HELOCs (Home Equity Lines of Credit) got a lot more complicated after the 2017 tax law changes. The deduction didn't disappear — but it now depends entirely on what you did with the money, not just that you borrowed it against your home.
The Rule That Changed Everything: 'Buy, Build, or Improve'
Since tax year 2018, interest on a home equity loan or HELOC is only deductible if the loan proceeds were used to buy, build, or substantially improve the home that secures the loan. This is the single test that decides whether your interest counts. Before 2018, homeowners could deduct HELOC interest regardless of how the money was spent — covering tuition, credit card debt, or a car purchase. That blanket deduction is gone — and, as of the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025, permanently so. The rule was originally scheduled to expire after 2025 (which would have restored the old no-restrictions treatment), but OBBBA removed that expiration entirely, so the buy-build-improve test is now a permanent part of the tax code, not a temporary one.
What Actually Qualifies as an 'Improvement'
The IRS treats a kitchen remodel, a new roof, an addition, or a major system replacement (HVAC, plumbing rewire) as qualifying improvements. Routine repairs and maintenance — repainting a room, fixing a leaky faucet, replacing a broken window — do not count, even if they technically improve the property's condition. The distinction the IRS draws is between a capital improvement that adds value or extends the home's useful life, and ordinary upkeep that simply maintains it.
What Doesn't Qualify
If you took out a HELOC to consolidate credit card debt, pay for a child's college tuition, cover medical bills, or fund a vacation, that interest is not deductible under current law — even though the loan is secured by your home. This is the most common mistake freelancers and homeowners make: assuming that because the debt is secured by real estate, the interest automatically qualifies as a mortgage-related deduction.
The Combined Mortgage Debt Limit
Even when the funds are used correctly, there's a ceiling. Interest is deductible only on the combined balance of your original mortgage plus the home equity debt, up to $750,000 for loans originated after December 15, 2017 ($1 million for older mortgages, grandfathered in). If your combined balances exceed that threshold, you can only deduct a proportional share of the interest paid.
Documentation the IRS Expects
Because the deduction hinges entirely on use of funds, keep contractor invoices, permits, and receipts tied directly to the improvement project, along with the loan disbursement records showing the money went to that project rather than a general account. If you ever face an inquiry, this paper trail is what separates a deductible HELOC from a non-deductible one.
Frequently asked questions
Can I deduct HELOC interest if I used the funds for a rental property I own?
Yes, but it's treated differently — you'd deduct it as a rental expense against that property's income (Schedule E), not as a personal itemized deduction, and it must still finance improvements to that specific property.
Does refinancing my HELOC reset which rules apply?
No. What matters is the original use of the funds, not when or how many times the loan has been refinanced or consolidated afterward.
Is home equity loan interest an itemized deduction?
Yes. It only provides tax benefit if you itemize instead of taking the standard deduction — run both scenarios before assuming it will lower your tax bill.