TAX TREATMENT · IRS PUB 936 · LAST VERIFIED OCTOBER 2026
HELOC and HEL Interest Deductibility: Tracing Rules, TCJA Caps, IRS Publication 936
The rules are not complicated if you read them carefully. Most sites stop at “deductible for home improvement”. The actual rule requires tracing, has a hard cap, changed in 2017, and since 2025 has no end date. Here is the complete picture.
The Core Rule (TCJA 2017, Made Permanent by P.L. 119-21)
HELOC/HEL interest IS deductible as mortgage interest IF:
- Funds are used to buy, build, or substantially improve the residence securing the loan, AND
- Total combined mortgage debt (first + HELOC + HEL) stays under $750,000 ($375,000 MFS; $1,000,000 for debt incurred before 16 Dec 2017)
Source: IRC Section 163(h)(3)(F), as amended by the Tax Cuts and Jobs Act of 2017 and by section 70108 of Public Law 119-21 (4 July 2025), which removed the 2025 end date for tax years beginning after 31 December 2025. The same section lets mortgage insurance premiums count as deductible mortgage interest again from tax-year 2026.
HELOC/HEL interest is NOT deductible as mortgage interest if used for:
- Debt consolidation (credit cards, car loans, student loans)
- Investing (stocks, bonds, rental property): it may instead be investment or rental interest under the tracing rules
- Tuition or education
- Medical expenses
- Travel, vacation, furniture
- Business expenses (different mechanism may apply)
What Counts as “Substantially Improve”
Qualifying improvements
- New roof or roof replacement
- Kitchen remodel (structural/fixture replacement)
- Bathroom addition or full remodel
- Room addition
- HVAC system replacement
- Windows and doors replacement
- Plumbing and electrical system upgrades
- Accessibility modifications (ramps, wider doorways)
- Swimming pool (attached to property)
- Foundation work
Does NOT qualify
- Paint (cosmetic only)
- Furniture and appliances (if freestanding)
- Landscaping (unless integral to structure)
- Cleaning, routine maintenance
- Decorating
- Personal use items purchased with HELOC
The Tracing Requirement
The IRS does not take your word for it. Publication 936 requires that you be able to document the purpose of the funds. If you are audited, the examiner will ask for a paper trail from HELOC draw to qualifying expenditure.
This matters especially for HELOCs used for mixed purposes: part renovation, part personal. You must pro-rate the interest deduction accordingly.
Mixed-Use Example
$60,000 HELOC. $40,000 used for kitchen remodel (qualifying). $20,000 used to pay off credit cards (not qualifying). Two thirds of the interest is deductible ($40k/$60k). Annual interest of $6,000: $4,000 deductible, $2,000 not deductible.
The $750,000 Cap in Detail
The cap applies to total acquisition debt on the residence: first mortgage + HELOC + HEL. If your first mortgage is $700,000, interest on at most $50,000 of HELOC is deductible, even when every dollar of the HELOC goes into the home. The table assumes the HELOC is used to substantially improve the home and the first mortgage is post-2017 debt.
| First Mortgage | HELOC Balance | Deductible HELOC Amount |
|---|---|---|
| $400,000 | $100,000 | $100,000 (all deductible, combined $500k) |
| $600,000 | $100,000 | $100,000 (all deductible, combined $700k) |
| $700,000 | $100,000 | $50,000 (half deductible, $750k cap hit) |
| $750,000 | $100,000 | $0 (first mortgage alone hits cap) |
Tax-Tracing Flowchart: Funds to Deductibility
Documentation Playbook
Bank statements
Transfer from HELOC to payment; transfer from payment to contractor/supplier.
Contractor invoices
Itemised invoices showing work performed, materials, dates, and property address.
Before-and-after photos
Dated photos of the improvement. Establishes what was done and when.
Permits
Building permits show the nature and scope of the work. Especially important for structural improvements.
Form 1098
Your lender sends this annually. Shows total mortgage interest paid, including HELOC interest.
Pro-ration worksheet
If HELOC is used for mixed purposes, create a worksheet showing the qualifying vs non-qualifying allocation.
FAQ
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