When Are HELOCs Tax Deductible?

A home equity line of credit (HELOC) provides a flexible source of funding based on the equity you built up in your home without having to refinance your primary mortgage. You may be wondering whether HELOCs, like other mortgages, are tax deductible. The answer is yes, within limits. But to qualify, the funds must be spent on your home.

Rocket Mortgage^® doesn’t offer HELOCs at this time, but we do offer alternatives like Home Equity Loans and cash-out refinances.¹

HELOC Tax Deduction Guidelines

When we refer to the tax deductibility of HELOCs, we’re referring to the tax deductibility of home mortgage interest. These rules are covered in publication 936 from the IRS. Nothing in this article is intended to serve as personalized tax advice. For questions on your unique situation, we encourage you to speak to a tax professional.

The three factors that determine the deductibility of your HELOC interest include when you took out the HELOC, the total loan amount for all qualified mortgages and how the funds were used:

• When you took out your HELOC: The rules for deducting mortgage interest in 2017 and after 2026 are different than the rules in effect for the 2018 – 2025 tax years under the Tax Cuts and Jobs Act.
• Total loan amount for all mortgages: There are limits for the deductibility of mortgage interest based on the amount of your mortgage balances. Under the regulation, you not only have to look at the amount you borrowed for your HELOC, but also the balances of any other mortgages on your primary or vacation home. The limits are lower for the 2018 – 2025 tax years.
• Use of the funds: Under the current regulations, you can only deduct mortgage interest – including from HELOCs – when the loan is used to buy, build or improve upon the home. For tax years before 2018 and after 2025, the interest can be deducted no matter what you use it for.

This isn’t related to the same deduction, but it’s worth noting that you can deduct mortgage interest as a rental expense if you were to use a HELOC to have work done on an investment property.

How Much Can You Deduct?

You can deduct all of your mortgage interest up to a loan amount threshold of $750,000 ($375,000 if married filing separately). All of your qualified mortgage balances for main and second homes count toward this limit.

If you closed on your mortgage prior to December 16, 2017, the mortgage debt limit is $1 million ($500,000 if married filing separately). If your loan amount is higher than the threshold that applies to you, or a portion of your mortgage was used to do something other than buy, build or improve upon the home, your interest may still be partially deductible. It requires some math.

Mixed-use mortgages get really complicated because it starts getting into average mortgage balances, but a tax specialist or software may help. We can talk about the threshold calculation, though. Deductible mortgage interest limits are based on a $750,000 threshold, you can only deduct the portion of the interest that was based on that amount, so here’s the formula:

$750,00

____________ × Interest Paid

Loan Amount

As an example, let’s say you bought a $1 million house in January 2021. If your 1098 reported that you paid $12,000 in deductible mortgage interest in 2024, the amount you could deduct from your income based on this would be as follows:

$750,000

                                __________  × $12,000 = $9,000

$1,000,000

Examples Of HELOC Tax Deductibility

Funds from a HELOC are only deductible on your taxes under certain circumstances. Let’s go over how this works.

Qualified Expenses

First, it should be noted again that the mortgage interest deduction only applies to your primary home and a single vacation home. Beyond that, there are three broad categories of qualified expense:

• Buy a home. You can use a mortgage to purchase an existing home.
• Build the house. You can also deduct interest paid on mortgages used to construct a brand-new home.
• Improve your current home. Interest can be deducted when the mortgage is used for home improvements such as an addition, remodeling the kitchen, or renovating the bathroom.

Nonqualified Expenses

Broadly speaking, under the current regulations, you can’t deduct interest paid on any mortgages not used to purchase, construct or improve your abode. Here are a couple of examples of nondeductible interest:

• Debt consolidation: If you use a HELOC to consolidate personal loan or credit card debt, you can’t take the interest deduction.
• Purchases other than homes or for home renovation: That is, you can’t deduct interest when the HELOC is used to buy a car.

How To Claim The HELOC Interest Deduction On Your Taxes

Before we get into how to claim this deduction, we should note that in order to do so, you need to itemize deductions. If the standard deduction comes out higher than your total deduction calculations, it makes more sense to take the standard deduction. Bearing that in mind, let’s take a look at how to claim this.

• Step one: Wait for your 1098 mortgage interest statement. Servicers usually send this in the early part of the year. You can also check your online account if you don’t normally receive mortgage statements.
• Step two: Calculate your total qualified mortgage debt between your main home and a single vacation home.
• Step three: If you’re over the threshold or a portion of your mortgage wasn’t used to buy, build or improve upon your home, divide the portion that does qualify by your total mortgage amount.
• Step four: Multiply the result of step three by the total interest on all of your mortgage interest statements.

Alternatives To HELOCs For Tax Deductions

When it comes to deductibility of mortgage interest, you can deduct interest for any mortgage used to buy, construct, or renovate or remodel a home. There’s nothing that says it has to be a HELOC.

Home Equity Loan

There are also tax deductible home equity loans. Home equity loans are similar to HELOCs in the sense that they are both second mortgages allowing you not to touch your primary mortgage, but still utilize your home equity. We’ll get into why you might not want to refinance your primary mortgage in a minute.

For now, understand that the difference between home equity loans and HELOCs is that as opposed to being a line of credit that freezes after the draw period, a home equity loan is a lump sum payment made after closing like a cash-out refinance. The rules around tax deductibility are the same.

Cash-Out Refinance

You can also get a cash-out refinance tax deduction. Unlike a HELOC or home equity loan, a cash-out refi replaces your existing primary mortgage rather than adding a second mortgage. You only have one payment.

The interest rates on a cash-out refi are also lower relative to home equity loans or HELOCs because the primary mortgage holder gets paid first in the event that your home is foreclosed upon. So there’s less risk.

So when would you take out a HELOC or home equity loan vs. a cash-out refinance? When you’re shopping around, lenders will take you through something called a blended rate calculation. Basically, they’ll do a weighted average calculation with both the amount and interest rate on a new second mortgage as well as your existing primary mortgage balance. The result is compared to the rate you would get by taking out a bigger balance on your first mortgage.

If the result of this calculation is that the interest rate is lower by taking out a second mortgage than it would be to do a cash-out refinance, they’ll recommend doing a home equity loan or HELOC. Otherwise, taking cash out by refinancing your primary mortgage makes the most sense.

The Bottom Line

The mortgage interest deduction is available for HELOCs as long as the proceeds are used to build, buy or improve a home. There is currently a limit on loan amounts of up to $750,000 across qualifying mortgages for first and second homes. It should be noted the loan limit is $1 million if you closed on or before December 15, 2017.

Although we’ve talked about HELOCs today, you can also deduct interest under the same rules with a cash-out refinance or home equity loan. Please consult a tax advisor about your situation if you have any questions. Rocket Mortgage doesn’t offer HELOCs at this time, but we do offer cash-out refis and Home Equity Loans. Start an application today to go over your options!

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. Not available in Texas. This is not a commitment to lend.