Are home equity loans tax deductible in 2023?

When you own real estate, home equity loans and home equity lines of credit (HELOCs) are effective tools to turn the equity you’ve built in the property into liquid cash. In the past, the interest you pay on these loans was even tax-deductible up to a certain limit.

But in 2017, the IRS changed the rules about writing off home equity loans. Now, fewer people and different loan types will qualify to deduct the interest on a home equity loan on their income taxes.

How home equity tax deductions work

Congress passed the Tax Cuts and Jobs Act (TCJA) on December 16, 2017, changing the rules for deducting interest on a home equity loan.

If you borrowed a home equity loan before the TCJA was passed, you can deduct: 

• Interest on loans up to $1,000,000 if you’re married filing jointly
• Interest on a maximum of $500,000 in loans if you’re a single or married taxpayer filing separately

These rules apply to both first and second mortgage loans on a primary or second home. Home equity loans opened after the TCJA, however, have different limits.

If you took out a home equity loan after the TCJA passed (December 16, 2017), you can deduct: 

• Interest on up to $750,000 in total mortgage debt — including loans on a first or second home, if you're married filing jointly.
• Interest on individual loans up to $375,000 if you're single or married filing separately.

What counts as deductible interest?

The tax deductibility of interest on a home equity loan or HELOC depends on how you spend the loan funds. Interest on home equity loans and HELOCs is only deductible if you use the funds to “buy, build, or substantially improve” the home to which the loan is attached.

This applies to interest on both new loans and those loans that existed before the TCJA was passed. 

Examples expenses you can deduct

• Finishing a basement
• Remodeling a kitchen
• Adding a deck
• Adding a home office
• Repaving the driveway 
• Replacing HVAC, like changing from baseboard heating into forced air

→ Learn what home improvements are tax deductible

Example expenses you can't deduct

The interest on a home equity loan isn't tax deductible if you used to funds for:

• Paying off debts or credit card loans
• Renovating your vacation home with a loan taken against your primary home
• Renovating someone else's home
• Buying a house for a family member
• Buying a rental home (more on second home and investment property interest deductions here)

Suppose you and your spouse borrowed $400,000 to buy a home in 2019. In 2020, you took out a home equity loan of $100,000 to renovate the kitchen and also to buy new furniture. You'd only be able to deduct interest on the portion of the loan you used towards the renovation, and not the furniture costs because that doesn't fall under "buy, build, or improve the home."

All of that said, the TCJA also increased the standard deduction substantially, making it pointless for most homeowners to itemize their home equity and HELOC tax deductions. In 2023, the standard deduction is $13,850 for single filers and $25,900 for couples who are married and filing jointly. Unless you’ve taken out a very large home equity loan or HELOC, you’re unlikely to have spent more than $25,900 (or $13,850) in interest in a fiscal year.

Claiming the home equity loan interest deduction

If you still want to claim a home equity loan, you must itemize deductions using IRS Form 1040. Again, you should only do so if your deductible expenses, including mortgage interest payments and eligible home equity loan interest payments, add up to more than the standard deduction of $13,850 or $25,900.

Here’s how to claim the deduction properly.

1. Make sure your loan qualifies

The checklist to ensure your home equity loan or HELOC qualifies for interest deduction includes:

• Your total mortgage debt should be at most $750,000 (or $375,000 for single filers). If you borrowed funds before 2018, you may go up to $1,000,000 (or $500,000).
• Your loans must be on a “qualifying residence,” such as a primary residence or a second home. The home you used the funds to buy, build, or improve upon must be the collateral for the loan.
• Your residential debt isn’t higher than the qualifying home(s) value.

Related: Learn about the. mortgage

2. Collect documentation

The IRS wants proof of everything. So, if you want to claim an interest deduction, you need your mortgage statements to verify how much you borrowed. You’ll also need receipts, contracts, and any other documentation you can find to prove that you used the funds to buy, build, or improve upon the house you used as collateral for the loan.

Before tax time, you should also receive an IRS Form 1098 from your lender. This Mortgage Interest Statement will tell you exactly how much interest you paid on your mortgage, home equity loan, or HELOC during the tax year. If you didn’t get it, call your lender.

3. Itemize and calculate your deductions

This is where things get tricky. The United States tax code is so complicated, most people just take the standard deduction. To determine your income tax deductions, you must add up all admissible payments throughout the year that you have documentation for. You can include property taxes and mortgage points on your primary residence, too.

If you have a new mortgage and you bought mortgage points to lower your interest rate or as an underwriting fee to your lender, you might be able to itemize them in your total deductions. Mortgage points count as prepaid mortgage interest, allowing you to deduct them if the loan was for your primary residence and it’s normal business practice in your area to pay mortgage points.

Factoring in mortgage points might help you get closer to surpassing the standard deduction but it gets tricky. Consult with your mortgage originator and/or tax advisor to help you figure out your specific situation.

Related: Are closing costs tax deductible?

4. File with a standard or itemized deduction

Finally, when you have an idea of your total tax-deductible amount, you must elect to file with a standard or itemized deduction. It’s a lot of legwork to get to this point and most homeowners will not have paid enough interest on a home equity loan or HELOC to justify the work in the first place.

When you get your 1098 from your mortgage lender, that’s a good jumping off point to figure out if it makes sense to do the hard work of itemizing. Remember, the standard deduction for 2023 is $13,850 for single filers and $25,900 for couples who are married and filing jointly. If your 1098 states you spent $22,000 in interest (an enormous amount), then maybe it makes sense to itemize. If you’re only around $5,000 in interest, it’s probably not worth the effort because you might save more with the standard deduction anyway.