The secret to saving on home improvements? Deduct HELOC interest

Home improvements can be costly. In fact, the typical homeowner spends around $6,000 annually just on repairs and maintenance, according to home insurance company Hippo. That’s not even including any updates or renovations you might want to make.

Fortunately, you may be able to offset those costs — at least a little — by using a home equity line of credit (HELOC) to pay for them.

Are you planning some home improvements this year? Here’s what to know about the HELOC tax deduction and how to take advantage of it.

Is HELOC interest tax deductible?

The interest you pay on a HELOC can be tax-deductible — but not always. It all depends on what you use the funds for.

According to the IRS, you can only deduct the interest you pay on a home equity loan or line of credit if “the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.”

You may also be able to deduct a portion of any discount points you pay on your HELOC (if any). Again, though, this is only if you use the credit line to buy, build, or substantially improve your home.

What qualifies as a substantial home improvement?

“Buying” and “building” a home are pretty straightforward terms, but what exactly does “substantially improve” your home mean? Luckily, the IRS lays it out pretty clearly.

According to the agency, a home improvement is considered “substantial” — and qualifies you for a write-off — if it:

  • Increases your home’s value

  • Prolongs the lifespan of your home

  • Adapts your home to a new use

Regular maintenance and fixing wear-and-tear issues don’t fall under the “substantial” umbrella, according to the IRS. As the agency explains in its mortgage interest deduction guide, “Repairs that maintain your home in good condition, such as repainting your home, aren’t substantial improvements. However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs at the cost of the improvements.”

How to deduct your HELOC interest on your tax return

If you do use your HELOC to buy, build, or substantially improve your house, then you can deduct that interest from your taxable income.

To do this, you’ll need to:

1. Make sure your HELOC qualifies.

You can only write off mortgage interest on debts up to $750,000. So, if your total mortgage debts go beyond this amount, you won’t be able to deduct any interest paid on the overage.

You will also need to make sure your house qualifications. This means it must be your primary residence or second home, and it must be the home that secures the HELOC.

2. Get your documentation together.

Before you can file your returns, you will need a 1099-INT form from your lender.

“Your bank should send you a 1099-INT at the beginning of the year,” says Kari Brummond, a tax preparer for Tax Cure. “This shows how much interest you paid during the previous year.”

You’ll need a total for any HELOC funds used to buy, build, or improve your home, too, so gather any receipts or contracts you have for the work done or materials purchased. Then, total these up. (You don’t need to send these in with your return, but make sure to keep them on hand in case you’re ever audited).

3. Itemize deductions

To take line-item write-offs like mortgage interest, you need to itemize your returns, which requires a Schedule A.

“You will note the 1099-INT amount on your Schedule A along with mortgage interest from your primary or secondary homes, plus any other itemized deductions you claim,” Brummond says. “You don’t have to send the 1099-INT to the IRS, but you should keep it for your records.”

Benefits of using a HELOC to improve your home

Aside from the tax season savings it can come with, there are other reasons a HELOC might be a smart option to explore if you’re looking to update your house right now.

For one, homeowners are sitting on record amounts of equity. Between the fourth quarters of 2021 and 2022, the average owner earned about $14,300 in home equity. In total, the typical home owner now has an equity stake of around $270,000.

If you need cash, HELOCs can be a good way to make use of this equity and avoid using financial products such as credit cards or personal loans, which usually result in more interest costs in the long run.

HELOCs are also a good alternative to cash-out refinancing right now for the same reason. If you’re one of the many homeowners who has a 2% to 4% rate on your main mortgage, refinancing now may not make sense, as that would mean replacing that low rate with a significantly higher one. HELOCs can help you access cash without having to touch the low rate on your original mortgage.

Get help with your HELOC

To learn more about HELOCs and tax deductions, speak to your tax preparer or a certified public accountant. And if you’re not sure a HELOC is the right move or you want to explore other options, like home equity loans, refinancing, or even home equity sharing, talk to a mortgage professional or financial advisor. They can provide guidance that’s personalized to your goals and budget.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publication. Check the lender’s website for the most current information.

this article was originally published on and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].