Key takeaways
What this article covers, in order:
- The rule: use of the money, not the type of loan
- The debt limit: $750,000 combined
- You also have to itemize
- When HELOC money goes into your business
- Worked example: one HELOC, three uses
- Common mistakes
HELOC interest is tax deductible only if you used the money to buy, build or substantially improve the home that secures the line of credit, and only if you itemize. Interest on HELOC money spent on anything else, such as paying off credit cards, buying a car or covering tuition, is not deductible as mortgage interest, no matter when you took out the loan. The same rule applies to a fixed-rate home equity loan.
There is one important twist for business owners: if you spent HELOC money in your business, that share of the interest may still be deductible, as a business expense rather than as mortgage interest. This guide explains the rule, the debt limits, what changed for 2026, and how to split the interest when a single line of credit paid for several things.
The rule: use of the money, not the type of loan
Many homeowners still remember when home equity interest was deductible whatever the money paid for. That ended with the 2018 tax year. IRS Publication 936 (2025) now states that interest on home equity loans and lines of credit is deductible only if the proceeds were used to buy, build or substantially improve the home securing the loan. The draft 2026 edition repeats the same rule.
What the lender calls the loan does not matter. A HELOC used to add a bedroom is treated like a mortgage; a cash-out refinance used to pay for a wedding is not, for the cashed-out part.
What counts as a substantial improvement
An improvement is substantial if it adds to the home's value, extends its useful life or adapts it to new uses. Examples include an addition, a new roof, a kitchen remodel, new heating or wiring systems, or finishing a basement.
Repairs that just keep the home in good condition, such as repainting or fixing a leak, are not substantial improvements on their own. Painting done as part of a larger renovation can be included in that project's cost.
The home must secure the loan
The improvement has to be to the same home that secures the debt. A HELOC on your main home used to renovate a rental property you own does not produce mortgage interest on Schedule A, although the rental-use interest may be deductible on Schedule E.
The debt limit: $750,000 combined
Qualifying HELOC debt is added to your first mortgage. You can deduct interest on the first $750,000 of total home acquisition debt, or $375,000 if married filing separately. Debt taken on before 16 December 2017 keeps the older $1 million limit ($500,000 if married filing separately). The limit covers your main home and one second home together.
So a $600,000 first mortgage plus a $200,000 HELOC used for an addition gives $800,000 of acquisition debt, and only 750/800 of the interest on the whole is deductible.
You also have to itemize
Mortgage interest is an itemized deduction on Schedule A. It only helps if your itemized deductions beat your standard deduction, which for 2025 is $15,750 for single filers and $31,500 for married couples filing jointly, and for 2026 is $16,100 and $32,200.
Two changes make itemizing more likely than in recent years. The cap on state and local tax deductions rose to $40,000 for 2025 and $40,400 for 2026 (half that if married filing separately), reduced for higher incomes but never below $10,000. And according to the draft 2026 Publication 936, the deduction for qualified mortgage insurance premiums returns for 2026, phasing out between $100,000 and $109,000 of AGI ($50,000 to $54,500 if married filing separately). That figure comes from a draft and could change before the final publication.
When HELOC money goes into your business
If you are a sole proprietor or own a single-member LLC and draw on a HELOC to buy equipment or fund working capital, the interest on that portion is generally treated as business interest under the IRS's interest-tracing approach. Publication 936 points to this: when proceeds are used for business or investment, the interest may be deductible elsewhere on your return rather than as home mortgage interest. For a Schedule C business, that means the business share goes on Schedule C, where it also reduces self-employment tax, and you get it whether or not you itemize.
Tracing depends on records. You need to show the HELOC draw went into the business and what it paid for. The cleanest way is to draw straight into the business bank account, or to pay the vendor directly from the HELOC.
Publication 936 also describes an election to treat a debt as not secured by your home, which can matter in edge cases where the home mortgage limits would otherwise apply. Once made it applies to later years too and can only be revoked with IRS consent, so ask a CPA before using it.
Worked example: one HELOC, three uses
Carla and James own a small Columbus landscaping business as a sole proprietorship and file jointly. In January 2025 they drew $30,000 on a HELOC secured by their home, which has a $410,000 first mortgage. They spent it like this:
- $18,000 on a kitchen remodel (new cabinets, counters and wiring).
- $9,000 on a commercial zero-turn mower, paid straight from the HELOC to the dealer.
- $3,000 to clear a credit card balance.
They paid $2,400 of HELOC interest during 2025, and for simplicity the balance stayed at $30,000 all year.
- Allocate by use: kitchen 60%, mower 30%, credit card 10%.
- Kitchen share: $2,400 × 60% = $1,440. Total acquisition debt is $410,000 + $18,000 = $428,000, under $750,000, so this is fully deductible home mortgage interest if they itemize.
- Mower share: $2,400 × 30% = $720. This is business interest on Schedule C, available whether or not they itemize.
- Credit card share: $2,400 × 10% = $240. Personal interest, not deductible.
- Itemize or not: their first-mortgage interest is $19,500, property tax is $6,200 and state income tax is $7,100. With the $1,440, itemized deductions come to $34,240, which beats the $31,500 standard deduction for 2025 by $2,740.
In real life repayments and new draws make the allocation more involved, because repayments are generally applied to the different uses in a set order. If you mix uses on one line, keep a running schedule or ask your CPA to set one up at the start.
Common mistakes
- Deducting everything on Form 1098. The lender's Form 1098 reports total interest. It does not know what you spent the money on. You must reduce the deduction yourself.
- Calling repairs improvements. A repaint or a patched roof on its own does not count.
- Ignoring the $750,000 cap. Add the HELOC to your first mortgage before assuming full deductibility.
- Mixing business draws into a personal account. Money that passes through household checking first is hard to trace.
- Skipping the itemize test. Deductible interest only helps if your itemized total beats the standard deduction.
- Forgetting basis. Improvements paid for with the HELOC also add to your home's basis, which can reduce taxable gain when you sell. Keep the invoices.
hellobooks< / a > -helps">How HelloBooks helps
The business half of a HELOC is a bookkeeping job, and HelloBooks is built for it. You can set up the HELOC as a liability account in your chart of accounts, record each draw used in the business as a loan, and post the monthly interest split with a journal entry that a person approves. Bank feeds and find-and-match tie the draw to the equipment bill, and the fixed assets register depreciates the mower. At year end your P&L shows the business interest separately, so your CPA can see exactly which share belongs on Schedule C.
General information as of November 2026, not tax or legal advice. Interest-tracing and mortgage rules have many exceptions; check IRS Publication 936 or ask a qualified CPA about your own loan.
