Home equity loan tax deductions: What to remember this tax season

Home equity loans come with many inherent benefits for homeowners, particularly in today’s economic climate. For starters, they allow borrowers to access large, potentially six-figure sums of money that may otherwise be difficult to secure with alternative borrowing products. And, because the home being used serves as collateral, lenders tend to offer interest rates much lower than what’s readily available with personal loans and credit cards. Plus, the interest paid on home equity loans is tax-deductible if used for IRS-eligible projects.

The latter feature is particularly important to understand now, with millions of Americans in the middle of tax season. Whether you already have a home equity loan or are considering applying for one now, it helps to know the tax implications tied to this unique borrowing tool. Below, we’ll detail three important items to remember about home equity loans this tax season.

Start by seeing how much home equity you’d be eligible to borrow here.

Home equity loan tax deductions: What to remember this tax season

Here are three important items to remember about home equity loan tax deductions:

The interest is deductible – not the loan amount

The interest paid on your home equity loan can be deducted from your taxes – not the total loan amount. So, if you paid $10,000 in interest on your $100,000 home equity loan in 2024, that would be the amount potentially tax-deductible, not the full loan amount. 

This is a major advantage, however, considering that home equity loan rates are much higher than they were earlier in the decade. At around 8.5% now for qualified borrowers, concerns over today’s rates can become less of an issue if homeowners know that they’ll be able to deduct the interest on the loan come tax filing season.

See what home equity loan rate you could qualify for here.

Only certain projects will qualify

“Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan,” according to the IRS. “The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.” 

The details here are specific. Projects like kitchen renovations and bathroom remodels may qualify but repairs (like fixing a broken toilet) may not. So be sure to understand the difference and consider speaking to your accountant or a tax expert to better delineate between what projects will and won’t qualify for home equity loan tax deductions.

The tax deductions apply to HELOCs, too

Currently, home equity lines of credit (HELOCs) have lower interest rates than home equity loans (8.28% versus a home equity loan’s 8.45%). And thanks to a variable rate, they could fall even further in the weeks and months to come. So if you’re looking for the least expensive way to borrow home equity, a HELOC may be preferable. 

But the same tax deduction benefits that apply for home equity loans are also applicable to HELOCs, thus adding another benefit to consider if you rather pursue the credit line. Just be sure to calculate your potential HELOC repayment costs tied to a variety of realistic rate scenarios to ensure future affordability.

The bottom line

Whether you already have a home equity loan that you’ve been borrowing from or are considering one for 2025, it’s important to understand the tax implications tied to this particular borrowing product. By familiarizing yourself with what does and doesn’t qualify, how those qualifications work and understanding the tax benefits that also apply to HELOCs, you can better improve your chances of home equity borrowing success, both this tax season and in future ones.

Learn more about borrowing with a home equity loan here.