"Is HELOC Interest Tax Deductible? The Three Conditions, and the 2026 Rule"

The last invoice from the kitchen contractor is paid, the new cabinets are in, and late in January a Form 1098 from the HELOC lender shows up with a number printed in box 1. You hand it to your tax preparer along with everything else, and the preparer asks a question the form cannot answer on its own: what did you spend the money on?

HELOC interest is deductible on your federal return when three conditions are met: you used the money to buy, build or substantially improve the home that secures the line; your total home mortgage debt is within the dollar limit; and you itemize your deductions.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, NMLS #483943, through C2 Financial Corporation. I arrange home equity lines and second mortgages, so I want to walk you through the rule the way the IRS writes it. I am a mortgage broker and not a tax adviser, so please confirm your own numbers with a CPA or tax preparer before you file.

If you are still deciding between a line, a lump-sum second mortgage and a cash-out refinance, second mortgages and HELOCs explained walks through that choice, and how a fast online HELOC works covers the application.

The rule for tax year 2026, and why it did not expire

The 2017 tax law changed how home equity interest is treated, and those changes were written to end after 2025. They did not end. Public Law 119-21, signed July 4, 2025, is the law the IRS calls the One, Big, Beautiful Bill. The Congressional Research Service's summary of the law says it makes the home mortgage interest deduction permanent, starting with tax years beginning after December 31, 2025.

The IRS's draft of Publication 936 for 2026 carries the same reminder the 2025 edition does. No matter when the debt was taken out, you cannot deduct interest on a loan secured by your home to the extent the proceeds were not used to buy, build or substantially improve that home.

So the three conditions below are the rule for the return you will file for 2026, and for the years after it.

Condition one: the money went into the home that secures the line

IRS Publication 936 is the IRS's own guide to the home mortgage interest deduction. It says interest on home equity loans and lines of credit is deductible only if the borrowed funds are used to buy, build or substantially improve the home that secures the loan.

Substantially improve. The same publication says an improvement is substantial if it adds to the value of your home, prolongs its useful life or adapts it to new uses. A new roof, an addition, a finished basement, a replaced HVAC system or a remodeled kitchen are the kinds of projects that fit. Repairs that keep the home in good condition, and the publication's own example is repainting, are not substantial improvements. Painting done as part of a renovation that does qualify can be included in the cost of that renovation.

The home that secures the loan. The statute defines acquisition debt as debt used to acquire, construct or substantially improve a qualified residence and secured by that residence. Both halves have to be true at once. A line on the home you live in, spent on that home, passes. A line on the home you live in, spent on a different property, does not meet this condition even though the money went into real estate. That matters if you are thinking about using your home's equity to buy before you sell: the mortgage on the new home can qualify, and the HELOC on the old home that funded the down payment generally does not.

Uses that do not count

The IRS's own answer to this question takes the case of money used to pay off personal debts, such as credit card balances, and answers it no for tax years after 2017. Buying a car is one of the examples in the IRS's own explainer video. The same rule covers tuition, a wedding or a vacation. Whether the interest is deductible depends on what the money was spent on, whatever secures the line.

Money spent on a business or an investment is a separate subject. The same publication explains that interest tied to those uses may be deductible as a business or investment expense under its own rules, and that is a question for your preparer before you draw the money.

Condition two: the combined debt is under the limit

The deduction is limited by how much home mortgage debt you carry in total, and your HELOC is added to your first mortgage for that count. Publication 936 for 2025 puts the limit for debt taken out after December 15, 2017 at $750,000, or $375,000 if you are married filing separately. Debt taken out before December 16, 2017 keeps the older $1 million limit.

The limit is one combined figure for your main home and your second home together. If your first mortgage and the improvement portion of your HELOC together stay under the limit all year, the interest on both is fully in play. If they run over it, Publication 936 has a worksheet that works out the deductible share from the average balances.

Condition three: you itemize

Home mortgage interest, including the qualifying part of HELOC interest, goes on Schedule A, the form for itemized deductions. You can deduct it only if you itemize. Itemizing only helps when your itemized deductions, added together, come to more than the standard deduction for your filing status. The standard deduction changes from year to year, so I am leaving that number to your preparer.

A client with a modest line and a smaller first mortgage often takes the standard deduction, and in that case the HELOC interest produces no separate tax benefit.

A HELOC used for two things at once

Plenty of lines get used for more than one purpose: $60,000 on the roof and the kitchen, then $30,000 to clear a car loan and two cards. The IRS calls that a mixed-use mortgage, and Publication 936 treats each part of the balance separately. The interest on the $60,000 that improved the home can qualify, and the interest on the $30,000 that paid off the car and the cards cannot.

The same publication applies principal payments on a mixed-use mortgage in a set order. They go first to any home equity debt that was not used to buy, build or substantially improve the home, next to any grandfathered debt, and last to the acquisition debt. As you pay the line down, the IRS treats the non-qualifying portion as the part being paid off first, so the qualifying share of what remains tends to grow over time.

Keeping that split provable is on you, and the lender's Form 1098 will not do it for you. Box 1 reports every dollar of interest you paid; it does not know whether the draw went to the contractor or the dealership. The Schedule A instructions include a checkbox for a mortgage whose proceeds were not all used on the home.

HELOC interest on a second home

Under Publication 936, a qualified home is your main home plus one other home you choose to treat as your second home, and the $750,000 limit is combined across both. A line secured by the second home and spent on the second home follows the same three conditions. A line secured by your main home and spent on the beach place generally does not meet condition one, because the home that secures the line is not the home that was improved. If the second home is in South Carolina, why property tax is higher on a second home here covers the other tax question that comes with it.

Before the first draw

A few things make the deduction easier to support later, and they are easiest before any money moves.

1. Decide the split up front. If part of the line is for the home and part is for something else, it helps to settle that now and take the money in separate draws, so the paper trail matches the plan when the Form 1098 arrives.
2. Keep the paperwork for the project. Please hold on to the contractor's invoices, the paid receipts, the permits and the final inspection sign-off, all pages. Those papers show where the money went, and that is the question the deduction turns on.
3. Have your current first mortgage statement in hand. The balance shows how much room is left under the combined limit, and it is also the number that decides whether a second mortgage or a cash-out refinance makes more sense for you.
4. Ask your preparer before you count on the deduction. Two clients can borrow the same amount on the same project and see different results on the return, because one itemizes and the other does not.

Common mistakes with the HELOC interest deduction

Deducting every dollar in box 1. The 1098 reports all the interest paid, including interest on money that went to cards or a car. That part is not deductible, even though it is on the form.

Treating a repair as an improvement. Repainting, patching a roof or replacing a broken appliance keeps the home in good condition, which is a repair. Replacing the roof or adding a room changes the home, which is an improvement.

An example, with invented numbers

Numbers below are made up to show the mechanism. Dana and the figures are invented, and nothing here is a quote.

Dana lives in a home she bought in 2021 with a first mortgage that now has a $320,000 balance. In 2026 she opens a $90,000 line. She draws $60,000 for a new roof and a kitchen remodel, then $30,000 to pay off her car and two credit cards. Over the year she pays $5,400 in interest on the line.

First mortgage balance                     $320,000
HELOC used on the home                      $60,000
                                           --------
Combined acquisition debt                  $380,000
Limit for debt after Dec. 15, 2017         $750,000
Under the limit?                                Yes

HELOC interest paid this year                $5,400
Share tied to the home (60,000 / 90,000)        67%
                                           --------
Interest that can qualify                    $3,600
Interest that cannot qualify                 $1,800

The $3,600 goes on Schedule A alongside the interest on her first mortgage, and it only helps her if those itemized deductions beat her standard deduction. The $1,800 is a cost of borrowing with no tax benefit. Her preparer would work the split from the average balances rather than a straight percentage, and because the IRS treats the car-and-cards portion as the part being paid first, the share that qualifies next year is likely to be higher.

Your next step

Whether to open a line depends on what it costs and what the money is for, and the tax treatment comes after that. The cost side comes down to the rate on your first mortgage, how much you need, and whether a second mortgage or a cash-out refinance is cheaper once both are priced. As a broker I can price a second through more than one lender and set it beside the refinance in the same conversation.

The rate tool on this site prices first mortgages. It does not price a home equity line or a second mortgage, so I quote those directly. You are welcome to call me at (843) 765-0000 or email me at jeff@solverya.com, and it helps to have your current mortgage statement and a rough idea of the project in front of you.

If you are weighing a cash-out refinance instead, the rate tool on the homepage shows pricing for that scenario. You can choose a rate option that works best for you, and that selection can change later. If you are in South Carolina, the South Carolina mortgage page covers what is specific to a loan here.

Nothing here is tax advice, a loan approval, a denial or a commitment to lend. Please confirm how the deduction applies to your own return with a CPA or tax preparer.

Common questions

Is HELOC interest tax deductible in 2026?

Yes, when three conditions are met: the money was used to buy, build or substantially improve the home that secures the line, your combined home mortgage debt is within the limit, and you itemize on Schedule A. Public Law 119-21 made the 2017 rules permanent, effective for tax years beginning after December 31, 2025, and the IRS's draft 2026 Publication 936 gives the same use-of-proceeds rule.

Can I deduct HELOC interest if I used the money to pay off credit cards?

No. The IRS's own FAQ answers that example no for tax years after 2017. Interest on a home equity line is deductible only to the extent the proceeds were used to buy, build or substantially improve the home that secures it. Paying off cards, a car loan, tuition or other personal expenses does not qualify, even though the line is secured by your home.

Does a HELOC count toward the mortgage interest limit?

Yes. The qualifying part of a home equity line is added to your first mortgage when the limit is applied. Publication 936 sets one combined limit across a main home and a second home, with a lower limit for debt taken out after December 15, 2017 than for older debt, and half the limit if you are married filing separately. The dollar figures for each are in the section above on condition two.

Do I have to itemize to deduct HELOC interest?

Yes. Home mortgage interest, including the qualifying part of HELOC interest, is an itemized deduction on Schedule A. If your standard deduction is larger than your itemized deductions added together, you take the standard deduction and the HELOC interest produces no separate tax benefit.

Is HELOC interest deductible on a second home?

It can be. The IRS treats your main home and one second home as qualified homes in Publication 936, and the dollar limit is combined across both. The line has to be secured by the home it was spent on. A HELOC on the second home used to improve that second home can qualify, while a HELOC on your main home used to buy or fix up the second home generally does not.