Eligibility for the Home Equity Interest Deduction
Home equity interest is deductible only if you itemize deductions and use the loan proceeds to buy, build, or substantially improve the home that secures the loan. The Tax Cuts and Jobs Act suspended the deduction for interest on home equity debt used for any other purpose, such as paying credit cards or funding a vacation, from 2018 through 2025.
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How the Loan Limit Works
The deduction is capped based on the loan's purpose. For acquisition indebtedness — the mortgage you took to purchase your home — the interest deduction applies to the first $750,000 of qualified debt (or $375,000 if you are married filing separately). Home equity debt that does not meet the improvement test counts toward this same limit, effectively squeezing out any deduction for non-qualified home equity loans.
| Loan Type | Qualified Use | Deductible? |
|---|---|---|
| Mortgage (acquisition) | Buy or build a home | Yes, up to $750K |
| Home Equity Loan / HELOC | Substantial home improvements | Yes, within the $750K limit |
| Home Equity Loan / HELOC | Debt consolidation, education, credit cards | No (2018–2025) |
What You Must Keep for an Audit
If you claim the deduction, the IRS requires proof that the loan proceeds were used for qualified home improvements. Retain contracts, invoices, and proof of payment showing the work was completed on the secured property. Without documentation, the deduction is vulnerable to disallowance.
State-Level Considerations
Some states still allow a deduction for home equity interest regardless of federal rules, or they conform to pre-2018 federal law. Check your state tax agency guidelines, as these rules vary independently from the IRS.