Many homeowners turn to home equity loans to fund home improvements, consolidate debt, or cover major expenses. One of the main advantages of home equity loans used to be the ability to deduct the interest on your federal income tax return. However, changes under the Tax Cuts and Jobs Act (TCJA) of 2017 significantly altered the rules around this deduction. As we enter 2025, many taxpayers are asking: Is home equity loan interest still deductible? The answer is—it depends on how you use the loan.
What Is a Home Equity Loan?
A home equity loan is a type of secured loan where you borrow against the equity in your home. Equity is the difference between your home’s market value and the balance of your mortgage. These loans typically come with fixed interest rates and are disbursed in a lump sum, unlike home equity lines of credit (HELOCs), which function more like credit cards.
Home equity loans are commonly used for:
- Home renovations or upgrades
- Paying for college tuition
- Consolidating high-interest debt
- Medical expenses
- Emergency needs or large purchases
Home Equity Loan Interest Deduction: Pre-2018 vs. Post-TCJA
Prior to 2018, homeowners could deduct interest on home equity loans up to $100,000 of principal, regardless of how the funds were used. This meant interest was deductible even if you used the money to buy a car or pay down credit cards.
However, under the Tax Cuts and Jobs Act (TCJA), which went into effect for tax years 2018 through 2025, this deduction was significantly limited. As of 2025, interest on home equity loans is only deductible if the loan proceeds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
Is Home Equity Loan Interest Deductible in 2025?
Yes, but with restrictions. The interest is deductible only if:
- The loan is secured by your primary or second residence
- The funds are used to substantially improve the property
- Your total mortgage debt (including primary and home equity loans) is within the IRS limit of $750,000 for married couples filing jointly or $375,000 for single/married filing separately (for homes purchased after December 15, 2017)
If you use the loan for personal expenses—such as vacations, cars, or paying down unsecured debt—the interest is not deductible.
Qualified Home Improvements
The IRS allows deductions only for “substantial improvements” to the home. Qualified uses include:
- Kitchen or bathroom remodels
- New roof installation
- Building an addition or garage
- Installing solar panels or energy-efficient systems
- Replacing HVAC, plumbing, or electrical systems
- Major landscaping projects that add value to the property
Regular maintenance, cosmetic upgrades, or repairs do not qualify for the interest deduction if done alone.
Documentation and IRS Compliance
If you plan to deduct home equity loan interest, the IRS expects you to keep detailed documentation of how the funds were used. You should retain:
- Invoices and receipts for renovation expenses
- Contracts with contractors or builders
- Photos of completed work, if applicable
- Proof that the home equity loan was secured by the home
Taxpayers who fail to prove that funds were used for qualified improvements may be disallowed the deduction and subject to back taxes and interest.
How to Claim the Deduction
To deduct eligible home equity loan interest in 2025:
- Itemize your deductions using Schedule A (Form 1040)
- Report qualified mortgage interest, including eligible home equity loan interest, on Line 8 of Schedule A
- Ensure you do not exceed the total $750,000 mortgage interest limit ($375,000 for MFS)
If you take the standard deduction, you cannot deduct mortgage or home equity loan interest. Therefore, itemizing is essential to benefit from this deduction.
Home Equity Loan vs. HELOC: Are the Rules the Same?
Yes. The rules regarding deductibility of interest apply equally to home equity loans and home equity lines of credit (HELOCs). The key is how the funds are used, not the type of loan product. Both must meet the IRS’s definition of “acquisition indebtedness” to qualify for a deduction.
What Happens After 2025?
The TCJA’s limitation on home equity loan interest deductions is set to expire after tax year 2025 unless Congress extends or modifies the law. If it expires, the old rule allowing interest deductions on up to $100,000 of home equity debt for any purpose may return. However, as of now, the restricted rules are in effect through December 31, 2025.
State-Level Considerations
Some states do not conform to federal tax laws regarding home mortgage deductions. You may be able to deduct home equity loan interest on your state tax return even if it’s disallowed federally. Check with your state’s department of revenue or a tax professional for specific guidance.
Tips to Maximize Your Tax Benefit
- Use home equity funds exclusively for home improvement projects
- Keep clear, organized records of all expenses
- Work with licensed contractors who provide proper documentation
- Consult a tax advisor to confirm deductibility before filing
- Evaluate whether itemizing deductions yields a greater tax benefit than taking the standard deduction
Common Mistakes to Avoid
- Assuming all home equity interest is deductible
- Using funds for non-qualified expenses like vacations or debt consolidation
- Failing to keep documentation of qualified home improvements
- Claiming the deduction while taking the standard deduction
- Not understanding the mortgage interest cap limits
Conclusion
In 2025, home equity loan interest remains deductible—but only under specific conditions. The funds must be used for buying, building, or substantially improving the home securing the loan, and total mortgage debt must remain within the federal limit. Misusing loan proceeds or misunderstanding the rules could lead to costly IRS penalties or missed deductions.
If you’re planning a renovation or considering a home equity loan, be proactive about your tax strategy. By understanding the current rules and keeping accurate records, you can maximize your deductions and possibly increase your tax refund. Always consult with a tax professional for personalized advice based on your financial situation.
