Is home equity loan interest deductible in 2026?
Every November, our Los Angeles office gets the same two phone calls. The first is from a homeowner who took a home equity line of credit to pay for a kitchen remodel and wants to make sure the interest will show up on next year’s return. The second is from a homeowner who used a HELOC to pay down credit card debt or help a child through college, and is quietly expecting the same answer. One of those calls has good news; the other does not. The One Big Beautiful Bill Act, enacted in July 2025, made the Tax Cuts and Jobs Act limits on home equity loan interest permanent. For 2026 and every year after, the deduction survives in only one scenario: the loan funded work on the home itself. This article walks through what the Internal Revenue Code actually says, where the planning room is, and the mistakes we see most often in homeowner returns.
Is home equity loan interest deductible in 2026 after OBBBA? 🏠
Yes, but only when the proceeds buy, build, or substantially improve the home that secures the loan. In every other case the interest is nondeductible personal interest.
The deduction for mortgage interest sits in Internal Revenue Code §163(h), which treats interest paid on “acquisition indebtedness” as qualified residence interest. Acquisition indebtedness is any debt incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and secured by that residence. There used to be a second category called “home equity indebtedness,” which allowed up to $100,000 of debt secured by the home to generate deductible interest regardless of how the proceeds were used. The Tax Cuts and Jobs Act suspended that second category from 2018 through 2025 and lowered the acquisition debt cap to $750,000 for loans originated after December 15, 2017.
The One Big Beautiful Bill Act removed the sunset. The $750,000 acquisition cap and the elimination of the home equity indebtedness category are now permanent features of the Code. Nothing automatically reverts after 2025. For practical purposes that means a HELOC, a home equity loan, or a cash-out refinance produces deductible interest only when the proceeds are traceable to a qualifying use on the same home.
What is “acquisition indebtedness” for home equity loan interest? 📋
Debt used to buy, build, or substantially improve the home that secures the loan. The IRS confirmed in 2018 that a HELOC can qualify as acquisition indebtedness when its proceeds fund a qualifying improvement.
The IRS addressed this question directly after TCJA passed. IRS IR-2018-32 explained that interest on a home equity loan, HELOC, or second mortgage is still deductible when the loan proceeds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The release gave a now-familiar example: a taxpayer takes out a $110,000 HELOC in 2018 to build an addition on the main home, and the interest on that loan remains deductible because the HELOC qualifies as acquisition indebtedness within the limits. OBBBA did not change that analysis; it only made the surrounding caps permanent.
Three elements have to line up:
- Purpose. The loan proceeds must be used to buy, build, or substantially improve a qualified residence — your main home or one second home.
- Security. The same residence that benefits from the improvement must secure the loan. A HELOC on your Los Angeles home used to improve a Palm Springs vacation property does not qualify.
- Dollar limit. Total acquisition indebtedness (original mortgage plus the improvement HELOC) is capped at $750,000 for post-TCJA loans ($375,000 if married filing separately). Pre-TCJA grandfathered debt carries the old $1,000,000 cap but counts against the ceiling.
What counts as a substantial improvement for the deduction? 🛠️
An improvement that adds value to the home, prolongs its useful life, or adapts it to a new use. Routine maintenance and cosmetic touch-ups do not qualify.
The “substantial improvement” standard is the same one used elsewhere in the Code for basis adjustments and capital expenditures. It is well developed in regulations and case law, and IRS Publication 936 summarizes it for homeowners. In practice, the distinction looks like this:
| Treatment | Examples that generally qualify | Examples that generally do not |
|---|---|---|
| Substantial improvement (deductible if HELOC-funded) | New roof, room addition, finished basement, in-ground pool, major kitchen or bathroom remodel, central HVAC replacement, re-wiring, re-plumbing, foundation work, seismic retrofit, solar roof install | — |
| Repair / maintenance (not deductible as acquisition debt) | — | Painting a room, repairing a leak, replacing broken tiles, patching the driveway, cleaning gutters, lawn and tree care, furniture or window treatments |
The line between a repair and an improvement can be close. A new roof is an improvement; patching a hole in the existing roof is a repair. A full kitchen remodel is an improvement; replacing a dishwasher is not. When the two run together on the same project — a remodel that also fixes some water damage — we document the portion of HELOC spend that corresponds to the improvement and treat the rest accordingly. The point is traceability, not a magic word in a contract.
How do the dollar limits for home equity loan interest work? 💰
Your original mortgage and any HELOC used for substantial improvement count together against a single acquisition-debt ceiling. The post-TCJA ceiling is $750,000; grandfathered pre-TCJA debt uses $1,000,000 but shares the same pool.
Many homeowners read the HELOC improvement rule and assume it is a separate bucket on top of their mortgage. It is not. Acquisition indebtedness is a single ledger. A $600,000 mortgage plus a $250,000 improvement HELOC equals $850,000 of acquisition debt, and interest on $100,000 of that balance is not deductible under the post-2017 cap. For a Southern California household refinancing into a jumbo mortgage and then layering on a HELOC for a renovation, the math gets tight quickly.
The pre-TCJA $1,000,000 cap still applies to acquisition debt originated on or before December 15, 2017 that has not been materially modified. Refinancing grandfathered debt generally preserves the old cap up to the refinanced balance, but any amount in excess of the refinanced principal moves into the post-TCJA $750,000 pool. Taking cash out at refinance can trigger a mixed-cap situation that we see mishandled every filing season.
Home equity debt is not a separate category anymore
The old $100,000 home equity indebtedness bucket is gone. OBBBA made that permanent. A lender’s paperwork may still describe the product as a “home equity loan” or “HELOC,” but for tax purposes the only question is whether the funds qualify as acquisition indebtedness. The label the bank uses does not control the deduction.
How do you prove the HELOC was used for home improvement? 📁
Trace the money. Deposit HELOC proceeds in a separate account, pay contractors from that account, and keep contracts, invoices, permits, and photographs. If the IRS questions the deduction, the burden is on the taxpayer to show the proceeds were used for a qualifying purpose.
- Open a dedicated account for HELOC draws. Even a basic no-fee checking account works. The point is that every dollar in came from the HELOC and every dollar out can be matched to a project payment.
- Pay contractors from that account, not from household cash. If you reimburse yourself later from the HELOC, document the two sides.
- Keep the project paperwork. City building permits, signed contracts, change orders, progress invoices, and final invoices. For California homeowners, the city permit record alone often resolves whether work was a repair or an improvement.
- Photograph the work. Before, during, and after. We have had audit defense turn on whether a finished basement is actually finished.
- Reconcile at year-end. Match the HELOC balance drawn to the project ledger. If some proceeds went to a nonqualifying use — a car payment, say — identify the mixed-use interest and allocate it. Form 1098 reports the gross interest paid; the deduction on your return reflects only the qualifying portion.
From our practice: the Form 1098 is a starting point, not an answer
Every January we see homeowners assume that because a Form 1098 arrived with a mortgage-interest figure on it, the full amount is deductible. The 1098 reports what was paid to the lender; it does not test whether the underlying debt qualifies as acquisition indebtedness. In a HELOC audit the IRS does not ask the bank what the loan was for — it asks you. The homeowners who come out best are the ones who built the file during the project, not in April.
What home equity loan interest is NOT deductible under OBBBA? 🚫
Interest on home equity debt used for anything other than improving the same home. Common nondeductible uses include college tuition, cars, credit card payoffs, medical bills, business capital, and vacations.
The practical effect of OBBBA is that a HELOC used as a general line of credit no longer produces any deduction, even though the loan is secured by the home and the bank reports the interest on Form 1098. Nondeductible categories we see most often:
- Education. Using a HELOC to pay tuition for a child does not create deductible mortgage interest. Interest on a federal or private student loan may be partially deductible under its own rules; a HELOC is not.
- Debt consolidation. Paying off credit card balances or a car loan with HELOC proceeds lowers your rate but moves the interest from one nondeductible bucket to another.
- Cars and major purchases. A HELOC used to buy a car produces personal interest.
- Business capital. If HELOC proceeds are contributed to or lent to a business, interest may be deductible on the business side under separate rules, but not as home mortgage interest.
- Investments. A HELOC used to buy stocks or fund a rental property down payment may generate investment interest expense or passive-activity interest subject to their own limits; it is not home mortgage interest.
How can California homeowners plan around the home equity loan rules? 💡
Match the loan to its use before you borrow. If the goal is a substantial improvement, structure the HELOC and the cash flow so that the proceeds pay the improvement directly. If the goal is something else, do not expect a deduction.
One sequencing decision usually decides the outcome. A homeowner planning a $100,000 kitchen remodel and separately contemplating a $100,000 withdrawal from a savings account for college tuition can achieve two very different tax results depending on which pool funds which project. If the HELOC pays the remodel and the savings pay the tuition, the HELOC interest is deductible acquisition-debt interest. If the HELOC pays the tuition and the savings pay the remodel, nothing is deductible. Same dollars, same projects, different result.
- Decide the use before you draw. If a HELOC is going to fund an improvement, draw against it only when the contractor invoice arrives. Avoid taking a lump-sum draw and parking the funds.
- Keep improvement and non-improvement uses on separate loans when possible. If you need cash for both a renovation and a car, consider a HELOC for the renovation and conventional financing for the car. The deduction math is cleaner and the audit trail is shorter.
- Mind the $750,000 ceiling. In high-cost markets, the combination of a jumbo first mortgage and an improvement HELOC can push total acquisition debt above the cap. Interest on the excess is nondeductible, and the allocation is computed under a specific formula that the lender’s software does not perform for you.
- Document even if you plan to take the standard deduction. Deductions change year to year as other items move. A tracing file costs nothing to maintain and preserves optionality.
- Coordinate with the sale. Substantial improvements that qualify as acquisition indebtedness during ownership also add to the home’s basis when you sell. The documentation that supports the interest deduction is the same documentation that reduces capital gain at sale.
Summary: Home equity loan interest after OBBBA
- The One Big Beautiful Bill Act made TCJA’s mortgage-interest limits permanent for 2026 and beyond.
- Home equity loan interest is deductible only when the proceeds buy, build, or substantially improve the same home that secures the loan.
- The $750,000 acquisition-debt cap applies to new loans and runs through a single ledger shared with the original mortgage. Pre-2018 grandfathered debt uses the old $1,000,000 cap.
- HELOC interest used for tuition, cars, debt consolidation, or business is nondeductible personal interest, even though Form 1098 reports it.
- Trace the money with a dedicated account, keep contracts, permits, and photographs, and reconcile at year-end. The deduction lives or dies on the paper trail.
Frequently asked questions about home equity loan interest ❓
Q. Is home equity loan interest deductible in 2026?
Only when the loan proceeds are used to buy, build, or substantially improve the same home that secures the debt. In that case the Internal Revenue Code treats the HELOC or home equity loan as acquisition indebtedness, and the interest is deductible as qualified residence interest if you itemize. Interest on a home equity loan used for anything else — college tuition, a car, debt consolidation, a vacation — is nondeductible personal interest for 2026 and beyond under the One Big Beautiful Bill Act.
Q. What did OBBBA change for home equity debt?
The Tax Cuts and Jobs Act suspended the separate home equity indebtedness deduction from 2018 through 2025 and lowered the acquisition debt cap to $750,000 for new loans. The One Big Beautiful Bill Act, enacted in July 2025, made both of those changes permanent for tax years after 2025. There is no longer a $100,000 home equity debt category under current law. The only way interest on a HELOC produces a deduction is if the loan funds qualify as acquisition indebtedness.
Q. What counts as a substantial improvement for the home equity loan interest deduction?
A substantial improvement must add value to the home, prolong its useful life, or adapt it to new uses. Replacing a roof, adding a bedroom or finished basement, installing an in-ground pool, upgrading electrical or plumbing systems, and major kitchen or bathroom remodels generally qualify. Routine repairs, painting, lawn care, and furnishings do not. The improvement must be made to the same qualified residence that secures the loan.
Q. What is the dollar limit for the home equity loan interest deduction?
For loans originated after December 15, 2017, total acquisition indebtedness on a principal residence and one second home is capped at $750,000 ($375,000 if married filing separately). Older grandfathered acquisition debt still carries the pre-TCJA $1,000,000 cap. A HELOC taken out today to substantially improve the home counts toward the $750,000 ceiling together with the original mortgage.
Q. Can I deduct a HELOC used to pay off credit cards or student loans?
No. Under current law, interest on home equity debt used for consumer purposes — credit card balances, student loans, cars, medical bills, business cash flow — is personal interest and nondeductible, even though the loan is secured by your home. The lender will still send a Form 1098, but the Form 1098 reports interest paid; it does not determine whether that interest qualifies for a deduction on your return.
Q. How do I prove a HELOC was used for home improvement?
Keep a clean paper trail. Deposit the HELOC proceeds in a separate account, pay improvement contractors directly from that account, and save invoices, permits, and before-and-after photographs. Mixing HELOC funds with other cash makes it hard to trace which dollars paid for the improvement, and the IRS can disallow the deduction if the tracing is weak. For California homeowners making large renovations, we treat the tracing file as part of the project binder, not an afterthought.
This article is general information, not tax advice for your situation. Mortgage interest rules turn on the exact use of each loan dollar and the structure of the underlying debt. If you are planning a home improvement, a refinance, or a HELOC draw in Los Angeles, contact SW Accounting & Consulting Corp for a review before the papers are signed.
