"Is HELOC Interest Tax Deductible? The Form 1098 Can't Tell You"

The kitchen is finished. The contractor's last invoice is paid, the new cabinets are in, and late in January a Form 1098 from the HELOC lender shows up with one number printed in box 1. Your tax preparer reads it, looks up, and asks the one question the form does not answer: where did the money go?

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 as 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 covers 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. The new law made them permanent instead. 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 you took the debt out, you cannot deduct interest on a loan secured by your home to the extent the money was not used to buy, build or substantially improve that home.

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 you used the borrowed money 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 are not substantial improvements, and the publication's own example is repainting. Painting done as part of a renovation that does qualify can be included in that renovation's cost.

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 meets this condition when you spend it on that home, and it does not when you spend it on a different property, 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 says that interest on money used to pay off personal debts, such as credit card balances, is not deductible 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, even though your home secures the line.

Money you spend 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. That is a question for your preparer before you draw.

Condition two: your 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. If your first mortgage and the improvement portion of your HELOC together stay under the limit all year, all of the interest on both can count, if you itemize. 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 your 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. That figure changes from year to year, so I am leaving it to your preparer.

A HELOC used for two things at once

Say you put $60,000 into the roof and the kitchen, then draw another $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. Grandfathered debt is the publication's name for a mortgage taken out before October 14, 1987, a much older group than the pre-December 16, 2017 debt above. 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; the lender's Form 1098 will not do it. Box 1 reports every dollar of interest you paid, with no record of whether a draw went to the contractor or the dealership. The Schedule A instructions include a checkbox for a mortgage where the money you borrowed was 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 is the other tax question that comes with it.

Before the first draw

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

1. The split between home and non-home uses. 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. The project paperwork. 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, which is what the deduction turns on.
3. Your current first mortgage statement. 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. A word with your preparer before you count on the deduction. Two clients can borrow the same amount on the same project and see different results, because only one of them itemizes.

Common mistakes with the HELOC interest deduction

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

Treating a repair as an improvement. The difference is whether the work keeps the home in the condition it was in, like repainting or patching a roof, or changes the home itself, like a new roof or an added room. The first is a repair, and the second is the kind of improvement the deduction is built for.

An example, with invented numbers

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

Lena 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. She pays $5,400 in interest on the line that year.

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 average balances rather than a straight percentage. 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

Back to that Form 1098. Box 1 is going to report every dollar of interest you paid on the line, and nothing on the form says which draw went to the contractor and which one cleared the car loan. Proving the split is on you, and it is easiest to set up before the first draw, which is something I can help with. If we set up a line together, we can plan the draws so the home portion and the non-home portion are separate from the start. The paper trail then matches the plan by the time the form arrives next January.

I can also help you decide whether a second mortgage is the right tool. As a broker I can price a second through more than one lender and set it beside a cash-out refinance in the same conversation, so you can see which one costs less once both are priced. 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. In South Carolina, a licensed attorney conducts the closing on a HELOC, same as on your first mortgage, and 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 rule on what the money has to be spent on.

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

No. The IRS's own FAQ says interest on money used to pay off credit cards is not deductible for tax years after 2017. Interest on a home equity line is deductible only to the extent the money you borrowed was 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. Debt taken out after December 15, 2017 has a lower limit than debt taken out before December 16, 2017, and a married person filing separately gets half of the newer limit. If your first mortgage and the qualifying part of the line together run over the limit, the publication's worksheet works out the deductible share from the average balances.

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.