Home Equity Loan Tax Deduction

Mortgage Interest is (Sometimes) Deductible

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The home equity loan tax deduction is different for tax years 2018 and beyond. This page remains to describe how things used to work, but it's more important than ever to review your financial situation and your deductions with a tax professional before making big decisions. For purchase loans, some deductions may still be available, but second mortgage deductions were updated with the Tax Cuts and Jobs Act. If you use the money for "substantial improvements" to your home, a limited deduction may still be available.

For Tax Years 2017 and Before

A mortgage can help you buy a home (or borrow against a property you already own), and it might even provide some tax benefits. The interest you pay might be deductible, but don’t rush to borrow just for savings on your 1040 – there are maximums and other limitations that might reduce or completely eliminate your ability to deduct interest.

This page covers general guidelines, but tax laws are complex and they constantly change. Verify the details and speak with a tax preparer before you claim a deduction.

Deducting Mortgage Interest

The IRS allows a deduction for interest paid on a loan secured by a first or second home. That includes several commonly-used loans:

  • Purchase loans (your primary mortgage when you borrow money to buy a house)
  • Home equity loans (also known as a second mortgage), which provide a lump-sum of cash
  • Home equity lines of credit, which allow you to spend from a credit line

The deduction can potentially make those loans less expensive, and can turbocharge certain strategies like debt consolidation (suddenly the interest you pay becomes tax deductible – not just an expense). However, there are limits to how much you can deduct, and when you can deduct.

Of course, you’re also using your home as collateral when you get a second mortgage, which means the lender can foreclose on your home if you don’t make the payments. Using that money for anything besides home-related expenses means you’re adding a risk where it didn’t previously exist.

First or second home: the deduction is not for investors who own dozens of homes. To qualify, the loan must be on your “first or second” home. If you rent out a property, share it, or use it as an office, your deduction may be affected.

Loan criteria: your loan must be secured by your home. Check with the IRS for details, but this generally means your lender has a lien on your home and can foreclose if you fail to pay. In addition, you need to meet one of the following criteria:

  • The debt is from October 13, 1987 or before (known as “grandfathered” debt), or
  • The debt was used to buy, build, or improve your home, and the total amount of debt is below $1 million
  • The debt was not used to buy, build, or improve your home, and the total amount of debt is below $100,000

In some situations, such as when married filing separately, the amounts are reduced.

No shams: the IRS states “Both you and the lender must intend that the loan be repaid.” This would eliminate any fancy schemes where you try to use a sham transaction to save on taxes. For example, you can’t “borrow” from a family member, deduct the interest, and forget about the loan – the loan must function as a true arm’s length transaction.

Construction loans: if you’re building a home, this deduction might help reduce your costs on a construction loan. The IRS allows you to treat a home under construction as a qualified home for up to 24 months as long as you meet certain criteria.


  • Dollar amount: as shown above, the interest deduction from your home equity loan is not unlimited. The limit is higher for money used to buy, build, or improve your home. For most people, that works well. However, if you use the money for another purpose (like higher education, debt consolidation, or something else), you’re capped at $100,000 of debt. Note that the maximums refer to the size of the loan – not the amount of interest you pay each year.
  • Alternative minimum tax (AMT): if you’re subject to AMT, you may see further limitations. In general, the deduction is more helpful if you use the money to buy, build, or improve your home.
  • Itemizing deductions: the mortgage interest deduction is only available if you itemize, and many people don’t itemize. It’s typically best to take the largest deduction available – if your standard deduction is more than you’d get from itemizing, your mortgage interest costs might not offer any tax benefits. If you’re not sure if you itemize, check to see if you’ve filed Schedule A. To get above your standard deduction, you might need a sizeable loan or other expenses to help (such as high medical expenses, for example).
  • A deduction isn’t a credit: some people confuse tax deductions with tax credits. A deduction helps to lower the amount of income used to calculate your taxes due. A credit is a dollar-for-dollar reduction in what you owe. A deduction will indirectly reduce your tax bill, but it isn’t nearly as powerful as a tax credit.

How Much can you Claim?

If you’ve borrowed against the equity in your home and you want to know how much interest you’ve paid, ask your lender. You should receive a Form 1098 with details about interest for the year.

Do your Homework

Claiming a deduction improperly is problematic: it can lead to tax penalties and interest charges from the IRS. Verify all of the details about your situation (and current tax laws) by reading IRS Publication 936. Remember that tax laws are complicated, and things may have changed since this article was written. Speak with a tax preparer who is familiar with the details of your loan to avoid any problems.

Again, this deduction is generally not available after tax year 2017. This article is for historical reference only.