When Is HELOC Interest Tax-Deductible?

Published June 26, 2022

A home equity line of credit (HELOC) is one of the most popular forms of borrowing for homeowners who have built up equity in their property. During the HELOC's draw period, you're only required to make interest payments on the debt itself. Then, after the draw period closes, you pay back the principal plus interest.

If you only make interest payments while the line of credit is active, you might put a considerable amount of money toward interest over the HELOC's lifespan. In certain situations, this interest is tax-deductible. However, due to changes in the tax code in 2017, homeowners face more restrictions on deducting interest from HELOCs and similar loans. If you have a HELOC, you might wonder how the interest deductions work, when is the HELOC interest deductible, and whether you can deduct interest from a HELOC on your second home. 

When is HELOC interest deductible?

First, homeowners should be aware that they can only deduct their HELOC interest if they itemize their deductions on their taxes. For most homeowners, the standard deduction amounts to more than their itemized deductions. Unless you're claiming a substantial amount of interest or a number of other deductions, it's probably better to forgo the HELOC deduction and simply claim the standard deduction.

If you do choose to itemize, current tax laws make HELOC interest deductible only when you use the funds to improve or build upon the home. For example, you might take out a HELOC to renovate your home's kitchen, install solar panels, or build an addition to the house. In these cases, you're eligible to claim your HELOC interest on your taxes.

These tax laws apply to homes that were purchased after October 13, 1987. Mortgages that originated on or before October 13, 1987, are known as "grandfathered debt," and the current restrictions do not apply. 

When isn't HELOC interest deductible?

Your HELOC interest is not tax-deductible if you use the funds for any purpose other than making upgrades and improvements to the property. Homeowners often use their HELOC for medical bills, tuition, vacations, and other purposes, but none of these uses of your HELOC will qualify you for a tax-deduction. 

The interest also isn't fully deductible if your HELOC and other mortgage debt exceeds the limits set by the IRS, which is $750,000. For married couples filing separately, the limit is $375,000. If your total mortgage debt amounts to more than the limit, you can only deduct a portion of your interest. 

Is HELOC interest deductible on second homes?

The HELOC interest deduction laws for second homes are the same as the laws for primary residences. You can only claim the interest if you use the line of credit to make improvements to the property you're borrowing against. This means that, in order to claim the interest, you can only use the funds from your second home's HELOC to upgrade that home. You cannot use the money from your vacation home's HELOC to renovate your primary residence if you want to claim the interest on your taxes.

HELOC interest is only tax-deductible in specific situations, so you should be very cautious when claiming this deduction. If you're unsure whether you qualify for the HELOC interest deduction, you should consult with a mortgage consultant or tax expert. The current tax code is incredibly complicated, so working alongside a professional will put your mind at ease.