In both the United States and many parts of Europe, tapping into home equity has long been a favored strategy for middle- and upper-income households to unlock liquidity. This approach allowed homeowners to leverage rising property values, often with the added benefit of deducting the interest paid on these loans from their income taxes.
However, the landscape has shifted dramatically since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, and with the July 2025 tax reform law now making those provisions permanent, homeowners must navigate a much stricter set of rules.
Under the current regulations, in order to claim a tax deduction on the interest paid for a home equity loan or home equity line of credit (HELOC), the borrowed funds must be used directly to "buy, build, or substantially improve" the property that secures the loan. This fundamentally changes the flexibility homeowners once had in using home equity as a financial tool.
According to Ryan Cicchelli, founder of The Safe Investing Expert, a financial advisory firm in Cadillac, Michigan, “You can still deduct interest if the loan is used for major upgrades—things like adding a new room, installing a new roof, or completely remodeling a kitchen. But if the funds go toward paying off student loans, funding a vacation, or covering tuition, the interest is no longer deductible—even if the loan is secured by your home.”
It’s not just the nature of the expense that matters—the property securing the loan must be the one benefiting from the improvement. For instance, if a homeowner takes out a HELOC on their primary residence but uses the funds to renovate a beachfront vacation home, the interest is not tax-deductible under current IRS rules.
Furthermore, TCJA introduced strict caps on how much mortgage interest could be deducted. For loans taken out after December 15, 2017, the combined limit for deductible mortgage debt is $750,000 for joint filers, and $375,000 for single or separate filers. For loans obtained before that date, the limits remain at $1 million and $500,000, respectively.
Crucially, these limits are cumulative—meaning they include the outstanding balance on your first mortgage. For example, if you have an existing mortgage of $500,000 and take out a $200,000 home equity loan, only $250,000 of the new loan will be eligible for interest deduction under the $750,000 cap.
Consider a real-world scenario. In 2022, James and Linda, a couple from San Francisco, took out a $200,000 home equity loan. Half of the funds were used to pay off credit card debt, and the other half went toward building a home office. Only the interest on the $100,000 used for the home improvement is tax-deductible; the other half does not qualify under the new law.
Or take Natalie, a software engineer from Brooklyn, who already had a $700,000 outstanding mortgage when she obtained a $100,000 HELOC in 2025 to renovate her kitchen. Since her total debt now equals $800,000—exceeding the $750,000 cap—only interest on $50,000 of the HELOC is deductible.
Another important factor: taxpayers must itemize deductions to benefit from this rule. With standard deductions rising significantly in recent years, many households now find it less advantageous to itemize, even when eligible. As of 2025, the standard deduction for married couples filing jointly stands at $29,200. Unless the total of itemized deductions—mortgage interest, charitable donations, medical expenses, etc.—exceeds this figure, it makes more sense to take the standard deduction.
So, how should homeowners approach this from a practical standpoint? First, clearly identify your total mortgage and home equity balances. You can find this information on your most recent loan statements or by contacting your loan servicer. Next, ensure that your use of the funds qualifies under IRS guidelines.
The IRS does not provide an exhaustive list, but generally, a “substantial improvement” includes:
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Adding new rooms or garages
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Replacing an old roof
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Upgrading HVAC systems
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Remodeling kitchens or bathrooms
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Resurfacing driveways or building drainage systems
Routine maintenance or aesthetic updates—like repainting walls or buying appliances—do not typically meet the threshold for tax deductibility.
From a financial planning perspective, the revised tax laws significantly limit the flexibility homeowners once enjoyed with home equity loans. While the changes curb aggressive or speculative borrowing, they also push families to think long-term and be more strategic. For those truly investing in their homes—whether to increase value or adapt for multi-generational living—tax-deductible interest remains a viable benefit.
In places like Boston, where home prices remain high, real estate consultant Tracy Keller notes that many middle-income families are now using HELOCs in phases. “Instead of borrowing $100,000 all at once, they’ll borrow $50,000 for immediate structural repairs, then wait a few years before drawing another $30,000 for interior updates. This phased approach helps manage both loan exposure and tax strategy.”
From the policy side, making the TCJA limitations permanent sends a clear signal: home equity borrowing should support housing stability and property improvement—not lifestyle upgrades or personal debt consolidation. It’s a shift toward greater accountability and transparency in personal finance.
In today’s environment of rising interest rates and elevated home prices, homeowners in cities from Los Angeles to London must adopt a new mindset. Those who leverage their home equity with clear, IRS-compliant strategies can still benefit from meaningful tax breaks. The key is planning: know your debt limits, use your funds wisely, and always keep the purpose tied to the property.
Ultimately, whether you're a software engineer in Brooklyn, a retired couple in Texas, or a self-employed designer in Dublin, navigating the new home equity rules with clarity and discipline can still yield solid financial rewards. In a market where flexibility is shrinking, precision is power.