Understanding How HELOC Tax Deduction Works

Home equity is a powerful financial tool, and for many homeowners, a Home Equity Line of Credit (HELOC) can unlock significant opportunities—from home improvements to consolidating debt. But did you know that a HELOC can also offer valuable tax benefits? When used strategically, the interest paid on your HELOC may be tax deductible—saving you money and lowering your overall tax burden.

This guide breaks down everything you need to know about HELOC interest deductions, covering how they work, when they're worth it, and how to claim them. Plus, we’ll introduce you to Better's home equity line of credit, which has an application that takes as little as 3 minutes and allows you to get cash in as little as 7 days.

What type of home loans are tax deductible?

Generally, the mortgage interest on home equity loans, home equity lines of credit (HELOCs), and primary mortgages may be tax deductible, but there are specific conditions. To qualify for a tax deduction, the loan must be secured by your home and the funds must be used for qualified home improvements, such as remodeling your kitchen or adding an extension.

In addition, only the interest on a home equity loan or line of credit is tax-deductible, not the loan principal itself.

How is HELOC interest tax deductible?

The IRS allows homeowners to deduct interest paid on HELOCs, but specific conditions must be met. As mentioned before, the HELOC funds must be used for qualified home improvements, such as remodeling a bathroom, updating your kitchen, or replacing your roof.

By meeting these conditions, homeowners can effectively reduce their taxable income by the amount of equity loan interest they paid throughout the year. For example, if you paid $3,000 in HELOC interest and qualify for the deduction, that $3,000 is subtracted from your taxable income—potentially lowering your tax bill and offering significant savings, especially for those in higher tax brackets.

Because this deduction requires itemizing deductions rather than taking the standard deduction, homeowners should evaluate whether this approach yields the greatest savings. If you're considering a HELOC, it's important to understand the rules and requirements involved. You can learn more about the basics of HELOCs in this detailed guide.

What qualifies as "qualified home improvements" for a tax deduction?

Projects that add value to your property, such as remodeling your kitchen, updating bathrooms, or replacing the roof qualify as "qualified home improvements" that you can deduct equity loan interest from. Maintenance repairs — like fixing a leaking roof — typically do not qualify. 

How can tax deductions on home equity loans help homeowners?

By deducting the interest paid on a HELOC, you effectively lower your taxable income. But even if you don’t qualify for a tax deduction, a HELOC can still be a valuable financial tool. Compared to credit cards or personal loans, HELOCs often offer lower interest rates and more flexible repayment terms.

If you’re weighing the benefits of a HELOC versus other options, check out this comparison of a home equity line of credit vs home equity loan to decide which option works best for you.

HELOC vs. home equity loan: What’s tax deductible?

While both home equity loans and home equity lines of credit are ways to tap into your home's equity as cash, a home equity loan offers a lump sum payment with fixed interest rates, while a home equity line of credit (HELOC) provides flexible access to funds with variable interest rates. 

The tax deductibility of interest on HELOCs and home equity loans are based on how the loan funds are used and IRS guidelines. If the HELOC or home equity loan is used for purposes other than home improvement or repairs, like paying off credit card debt or covering education expenses, you generally cannot deduct the interest.

These interest deductions are claimed on Schedule A (Form 1040) as itemized deductions as long as they meet the IRS’s qualified use criteria. Understanding these distinctions can help you strategically manage your borrowing and tax-saving opportunities.

Is a HELOC still worth it without deductible interest?

Even without the deduction, taking out a home equity line of credit  (HELOC) or home equity loan can make financial sense. A HELOC, specifically, provides flexible, lower-interest borrowing power for a variety of purposes, including:

• Debt consolidation
• Education expenses
• Emergency funds
• Renovations and home upgrades

While you may not see direct tax benefits, the potential savings from a HELOC’s lower interest rate compared to credit cards or personal loans can still make a major difference. Additionally, using a HELOC to invest in your property’s value will enhance your home's equity over time.

How to deduct and claim taxes with HELOC

If you're eligible to deduct the interest paid on your HELOC, follow these steps to ensure you claim it correctly:

1. Decide if claiming the tax deduction is worth it

To claim a HELOC interest deduction, you need to itemize your deductions on your tax return. This means forgoing the standard deduction, so it’s important to evaluate whether itemizing will result in greater savings. Working with a tax professional can help you make that determination. Your tax professional can help you compare your total eligible deductions (including HELOC interest) with the standard deduction to determine the most beneficial approach. 

2. Collect all necessary paperwork

Gather the documentation required to claim the deduction:

• IRS Form 1098 from your lender, which outlines the interest you paid on your HELOC. Also, your monthly HELOC statements will provide a detailed breakdown of the total interest paid over a given period.
• Receipts and invoices proving that HELOC funds were spent on qualified home improvements.
• Documentation of the cost and scope of the improvements made to your home.

3. Calculate the total deduction

Determine how much of your HELOC’s interest qualifies for deduction by considering:

• The total amount of interest paid for the year.
• The proportion used for qualified home improvement expenses.

Use this information to accurately calculate the deductible amount while staying within the cap limits set by the IRS.

File your taxes and claim your deduction

When filing your tax return:

• Report the deductible interest on Schedule A (Form 1040), under the “Home Mortgage Interest” section.
• Include any supporting documents with your tax filing where required.

If you’re unsure about anything, it’s advisable to consult a tax professional to avoid errors or penalties.

Key benefits of HELOC tax deductions

A HELOC tax deduction offers multiple advantages for homeowners. Understanding how to leverage these opportunities can improve your overall financial health:

• Lower tax burden – By reducing your taxable income, you may owe significantly less when April rolls around.
• Empowered financial planning – A HELOC allows for strategic investments in your property, boosting its long-term value while taking advantage of immediate tax savings.
• Accessible funding – HELOCs typically provide an affordable borrowing option compared to other loans, regardless of whether or not the interest is deductible.

Key rules for deducting HELOC interest

1. Funds must be used for home improvements

The Tax Cuts and Jobs Act of 2017 introduced a crucial rule for HELOCs to qualify for a tax deduction. The funds must be used solely for "qualified home improvements." This includes renovations or repairs that add value to your home, such as remodeling your kitchen, replacing the roof, or building an addition.

Understanding the key HELOC requirements can help you avoid issues when applying for a loan. Be sure to check out this resource on the essential HELOC requirements to ensure you’re prepared.

2. Home Equity Loan vs. HELOC

Both home equity loans and home equity lines allow you to borrow against your home's equity, and the interest deduction rules apply to both equally—provided the funds are used for eligible home improvements.

Cash out refinances are another way to tap into home equity but work differently that home equity loans and HELOCs.  Understanding the differences between home refinances and home equity loans will help you understand which option fits your needs.

3. Deduction limits apply

The IRS sets a cap on the mortgage debt that qualifies for interest deductions. Currently, this limit is $750,000 for married couples filing jointly and $375,000 for individual filers. This total includes your primary mortgage and any HELOC or home equity loan.

Unlock your home equity with Better

Navigating the details of HELOC tax deductions might seem complex, but the benefits are well worth it. With a HELOC, you gain not only financial flexibility but also the potential to save thousands of dollars in taxes.

If you’re thinking about getting a HELOC, why not make the process as smooth as possible? Better offers a simple, digital HELOC application with approval in as little as three minutes and the ability to get cash from your couch in as little as 7 days. The Better platform ensures a seamless experience, helping you unlock your home’s equity fast and easily to achieve your financial goals.

....in as little as 3 minutes – no credit impact