Is Interest on a HELOC Tax-Deductible?

Published June 4, 2022

Depending on how much you borrow from your HELOC, you may pay a considerable amount each year in interest. Tax laws regarding HELOC and mortgage interest deductions have changed over the years, so homeowners may be confused about whether they can claim interest on their taxes. 

The IRS outlines very specific guidelines for this deduction, but in general, homeowners can claim HELOC interest when they use the loan to make home improvements. 

Is your HELOC interest tax-deductible? Here's everything you need to know about deductions for a HELOC.

When is HELOC interest tax-deductible?

You can make your HELOC interest tax-deductible in specific situations. Keep in mind that HELOC interest is not always deductible. In order to claim the interest on your taxes, you must use your HELOC on repairs, upgrades, or other projects that improve the property. 

The following are examples of uses of the line of credit that could make your HELOC interest tax-deductible: 

• Replacing the roof, plumbing system, electrical system, or other major repairs

• Renovating the kitchen or bathroom

• Replacing appliances

• Building an addition to the home

• Installing solar panels

You can only claim the deduction when you use the funds from the HELOC to make improvements to the property on which you took out the loan. For example, if you took out a HELOC on your primary residence and used the money to renovate your vacation home, you cannot claim the interest deduction.

Keep in mind, too, that you can only make your HELOC tax-deductible if you itemize your deductions. Taxpayers can choose whether to add up each deduction they qualify for or to claim the standard deduction, which is $12,950 for single filers and $25,900 for married couples in 2022. Unless you claim a wide variety of other deductions, the standard deduction is usually the better choice. Homeowners with an extremely large HELOC may find that itemizing to claim the interest saves them more money, but the majority of taxpayers claim the standard deduction to save time.

When isn't HELOC interest tax-deductible?

The funds from your HELOC are yours to spend however you want. Many people use their HELOC to pay their children's college tuition, pay back other debts, or cover medical expenses. However, none of these situations make your HELOC interest tax-deductible. Unfortunately, you can only deduct your interest payments when the money goes toward home improvements. 

Changes to tax deductions for HELOCs and other home loans occurred in 2017, and these changes apply to new loans as well as those that existed before the updated tax laws. Before 2017, you might have made your HELOC interest tax-deductible even if you didn't use the funds for home improvements. It's important to familiarize yourself with the updated tax code, as mistakenly claiming HELOC deductions could lead to penalties. 

How mortgage interest deduction works

Like the HELOC interest deduction, the mortgage interest tax deduction only applies when you choose to itemize your deductions. In most cases, homeowners opt for the standard deduction instead. The tax law changes in 2017 also affected how much you can claim from your mortgage interest, so it's essential that you seek out up-to-date information on the topic.

The current limit to the mortgage deduction is $750,000 for both married couples and single filers. This means that you can claim interest payments on up to $750,000 of your mortgage principal. If your mortgage is valued at more than $750,000, you can't claim your interest payments in full. 

Other benefits of a HELOC

Although there are more restrictions on HELOC deductions now than there were in the past, HELOCs still have plenty of benefits. Even if you can't claim the interest on your taxes, HELOCs offer competitive interest rates that are generally much lower than other forms of debt. This can be a cost-effective choice if you're in need of cash for a big upcoming expense.

HELOCs are also a good option for many homeowners because you only have to borrow the amount that you need. You don't need to borrow your entire line of credit or take out a massive loan. This system can prevent you from taking out an excessive amount of debt that may be difficult to pay back. 

The interest on your HELOC is only tax-deductible under certain circumstances. If you're not sure whether you can claim the interest on your taxes, you should consult with a mortgage expert or a financial advisor. A professional can help you make the most of your HELOC without violating any tax laws. Not sure if a HELOC is even right for you? Explore other mortgage and refinance options, like a cash-out refi or All In One mortgage.