Is home equity line of credit (HELOC) interest tax deductible?

Woman at a table researching if HELOC interest is tax deductible.

Please note: Discover® Home Loans offers a home equity loan product, but does not offer HELOCs.

The interest on a HELOC may be tax deductible, making it a popular choice for homeowners looking to finance home improvements or other large expenses.

It’s possible there may be some restrictions on how to use the proceeds from a HELOC, and the interest is only tax deductible if the loan is for qualified expenses.

Before signing any paperwork, be sure to understand your HELOC's tax implications. Consult your tax advisor for more information about your specific circumstances.

Continue reading for more information about HELOC tax deductions and how to qualify for them.

HELOC tax deductions: what to know

The interest on a HELOC may be tax deductible, but there are restrictions on how the proceeds from a HELOC can be used.
If you use a HELOC to buy, build, or improve your home, the interest may be tax deductible. However, if you use the loan for other purposes — for example, taking a vacation — the interest is not tax deductible.
To claim a deduction for interest paid on a HELOC, taxpayers must itemize their deductions on Schedule A of IRS form 1040.

When is HELOC interest tax deductible?

To qualify for the HELOC tax deduction, borrowers must use their funds for qualified expenses.

This includes things like expanding your home, remodeling certain spaces, or making repairs to your home's structure. The interest is only tax deductible if paid on the portion of the loan that's used for these expenses.

So, if you take out a $10,000 HELOC and use $5,000 of it to pay off credit card debt, you can only deduct the interest on the remaining amount that was used to pay for a qualifying expense.

How to claim a HELOC tax deduction

First, you may need a 1098 Mortgage Interest Statement from your lender. This form will list the amount of interest you paid over the year. Next, you'll typically need documentation of how you used the loan funds. Finally, if you incur any additional interest expense, you might need to provide documentation for that too.

Once you gather all this information, you can itemize your deductions on Schedule A of IRS form 1040. If you have any questions, speak with a tax professional to ensure that you take all the necessary steps to claim your deduction.

Other advantages of HELOCs

HELOCs offer several advantages over other loans, including potentially low interest rates compared to alternatives like personal loans or credit cards and flexible repayment terms.

Also, you may use HELOCs for various purposes, such as home improvements, debt consolidation, or investment properties. Unlike loans that are disbursed in a lump sum, a HELOC allows borrowers to access funds as needed, making it a convenient option for unexpected expenses or emergencies.

Home equity loan vs HELOC

Home equity loans and HELOCs are both ways to borrow money against the value of your home. However, there are some key differences between the two. A home equity loan provides a lump sum of money that you repay over a fixed period with a fixed interest rate.

A HELOC, on the other hand, allows you to borrow money as needed up to a predetermined limit. The interest rate on a HELOC is usually variable, and you only pay interest on the amount you use.

Both loans can be helpful in different situations. For example, a home equity loan may be the better option if you need a large sum of money all at once. A HELOC may be best if you need ongoing access to funds over a longer period.

Whether you have a home equity loan or a HELOC, the interest you pay on the loan can typically be tax deductible if the loan meets certain requirements.

Looking for a fixed rate alternative to a HELOC? Discover Home Loans offers home equity loans with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.

Are HELOCs and home equity loans beneficial without a tax deduction?

There are still situations where a HELOC can be a smart financial move even without a tax deduction.

For example, suppose you want to refinance high-interest debts. In that case, a HELOC may allow you to save a significant amount of interest, even if you don't get a tax benefit from deducting the interest.

Likewise, suppose you need to borrow money for another reason like refinancing home renovations. Compared to a personal loan, credit card, or other borrowing option, a HELOC might save you money.

Just keep in mind that your home secures a HELOC. So, if you fall behind on your payments, you could end up in foreclosure. If you're considering taking out a HELOC, review your needs and ability to repay the loan before deciding.

HELOC tax deduction frequently asked questions (FAQs)

You should know a few things about the HELOC tax deduction before you start. Here are some of the most frequently asked questions about the HELOC tax deduction.

Is a HELOC interest tax deduction a good idea?

The answer to this will depend on your personal financial situation, and how you use the funds from your HELOC. The Tax Cuts and Jobs Act of 2017 raised the standard deduction to where it may make more sense to claim this on your taxes instead of itemizing deductions. Again, this will depend on your financial circumstances, and you may want to consider seeking out advice from a tax professional who can help determine what may work best for you.

How much of a HELOC loan is tax deductible?

Since a HELOC is considered a type of home mortgage, you may be able to deduct interest on up to $750,000 ($375,000 if married filing separately). For loans and mortgages taken out prior to December 16, 2017, that limit is $1 million ($500,000 if married filing separately). The loan funds must have been dedicated to buying, building, or making substantial improvements to your home to be considered tax-deductible.¹

Can HELOC interest rates change?

A HELOC typically has a variable interest rate, which means that the interest rate can change, just like the interest rate on any other variable-rate loan — an adjustable-rate mortgage (ARM), for one example.

However, there are some essential things to keep in mind. First, most HELOCs have a fixed interest rate for the first few years, so your payments will stay the same during that time. After that, the interest rate will adjust based on changes in the market. So, costs could go up or down depending on the factors your lender considers, like market conditions or creditworthiness.

If a variable interest rate doesn't work for your needs, you might consider a home equity loan, which generally has a fixed interest rate.

Do you pay taxes on HELOC?

Whether you pax taxes on a HELOC depends on how you use the loan.

The interest is tax deductible if you use the loan to buy, build, or improve your home.

However, the interest is not tax deductible if you use the loan for other purposes, such as investing in stocks or taking a vacation.

Can I deduct the interest on my HELOC if I use the money for something other than home improvements?

No, you cannot deduct the interest on your HELOC if you use the money for something other than home improvements. Additionally, the IRS considers home equity debt used for home improvements if you use the cash within 12 months of taking out the loan.

Do you need to pay income taxes on the money you borrow from my HELOC? 

Funds received from HELOCs or home equity loans are not considered an increase in your income. Instead, they are considered borrowed money — meaning they are not taxable as income. Therefore, the money you borrow is considered tax-free.

Closing thoughts: Is HELOC interest tax deductible?

So, is a home equity line of credit interest tax deductible?

The answer is: it depends.

According to the IRS, the interest is not tax deductible if you use the HELOC for personal expenses like education or medical bills. However, if you use the loan proceeds for home renovations that increase the value of your property, you may be able to deduct the interest on your taxes.

Before committing to a HELOC, talk to a tax advisor or accountant to see if you qualify for this deduction. They can also help you navigate some other considerations involved in taking out a HELOC, including closing costs and variable versus fixed interest rates.

If you’ve already decided that a HELOC isn’t right for you, consider exploring alternative borrowing options from Discover Home Loans. You may be eligible for a home equity loan with a minimum credit score of 680 and a combined loan-to-value (CLTV) ratio of up to 90%.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.