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Is Home Equity Loan Interest Deductible in 2026? Tax Rules Explained

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A split-screen image showing a modern white kitchen renovation on the left, with a contractor and homeowner reviewing blueprints. On the right, a desk features stacks of cash, a calculator reading "2026," an IRS Form 1098, and a model house, separated by a gold line.
Refi or Renovate? Calculating Tax Savings on Home Equity Loans & Energy Upgrades in 2026
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Refi or Renovate? Calculating Tax Savings on Home Equity Loans & Energy Upgrades in 2026

By Niche Calculators • Updated March 2026

Your home is likely your largest asset. And with rates stabilizing and equity at record highs, 2026 is shaping up as a big year for renovations.

But before you borrow, there's a tax twist you need to understand.

Homeowners tapping equity face two paths: a cash-out refinance (replace your mortgage) or a home equity loan/HELOC (add a second payment). And two massive tax changes just took effect:

  1. Major energy efficiency credits (Sections 25C and 25D) expired on December 31, 2025.
  2. The One Big Beautiful Bill Act (OBBBA) permanently extended the TCJA rules—meaning mortgage interest rules aren't "sunsetting" as previously expected.

So, what's deductible in 2026? What's gone? And how do you decide between refi and home equity?

Let's break it down.

The 2026 Home Equity Tax Rules: It's All About "Substantial Improvement"

A flowchart titled "HOME EQUITY LOAN PROCEEDS" showing two outcomes for tax deductibility. The left side (marked "YES" in a green circle with a checkmark) shows icons for home improvement tools and a house, with the text: "Used for Home Improvement → Interest Deductible (subject to limits)." The right side (marked "NO" in a red circle with an X) shows icons for credit cards, a car, and luggage, with the text: "Personal Expenses → Interest NOT Deductible."

The Golden Rule

Under the Tax Cuts and Jobs Act (now made permanent by OBBBA), interest on home equity loans and HELOCs is only deductible if the funds are used to "buy, build, or substantially improve" the home that secures the loan.

What's deductible:

  • Kitchen or bathroom renovation
  • Adding a new roof
  • Finishing a basement
  • Building an addition
  • Installing central air or HVAC replacement
  • New windows or doors (though the direct credit is gone)

What's NOT deductible:

  • Paying off credit cards or student loans
  • Buying a car
  • Funding a vacation
  • Using the money for investments
  • Using equity from Home A to improve Home B
"If you incur a new home equity loan and use the proceeds for significant home improvements, the debt may be treated as acquisition debt rather than home equity debt. Therefore, you can add this mortgage interest to your deductible total." — Ken Berry, J.D., CPA Practice Advisor

The $750,000 Cap

The total mortgage debt (first mortgage + home equity loan) on which you can deduct interest is capped at $750,000 for most taxpayers ($375,000 if married filing separately).

Example from the IRS:

In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible.

But if that same homeowner used the $250,000 for personal expenses? No deduction. The IRS calls this the "use test," and they're serious about it.

Major Alert: Energy Efficiency Credits Expired on Jan. 1, 2026

What Changed

As of January 1, 2026, two major federal tax credits for homeowners are no longer available:

CreditWhat It CoveredStatus for 2026
Energy Efficient Home Improvement Credit (Section 25C)Insulation, windows, doors, HVAC, water heatersExpired 12/31/2025
Residential Clean Energy Credit (Section 25D)Solar panels, battery storage, geothermalExpired 12/31/2025

Why This Matters for Your Renovation Plans

  • If you installed solar panels or new windows in 2025, you can still claim the credit on your 2025 tax return (filed in 2026).
  • If you're planning those upgrades for 2026, there is no federal tax credit waiting for you.
  • Exception: Some state-level incentives may still exist—check your state energy office.

Bottom Line: The "30% off solar" federal incentive is gone for 2026 installations. Your renovation tax savings now come only from interest deductibility, not direct credits.

Refi vs. Home Equity Loan: Tax Implications Compared

A split-screen graphic with a light beige background, rendered in a claymation style. The left side, titled "Cash-Out Refinance," features a tall stack of coins with a small house model on top. A red downward-pointing arrow indicates "Higher Total Interest," and a bubble notes "Closing Costs: 2-6%." The right side, titled "Home Equity Loan," shows a shorter stack of coins with a house model and a "First Mortgage Certificate" behind it. A green upward-pointing arrow indicates "Preserves Low Rate," and a bubble notes "Closing Costs: $500-$2,000." The text "Higher Total Interest" and "Preserves Low Rate" also appear below their respective coin stacks.

Option 1: Cash-Out Refinance

How it works: You replace your existing mortgage with a new, larger loan. You pocket the difference in cash.

Tax treatment: Interest on the entire new loan is treated as acquisition debt (deductible) only if the cash-out portion is used for substantial improvements. If you use the cash for personal expenses, only the interest on the original loan balance is deductible; the portion attributable to the cash-out is not.

The Catch: If current mortgage rates are higher than your existing rate, you'll pay more interest on the entire loan—potentially negating the tax benefit.

Example Math:

  • Home value: $400,000
  • Current mortgage: $150,000 at 4.5%
  • New cash-out refi: $270,000 at 7%
  • Cash received: ~$111,900 (after closing costs)
  • New monthly payment: $1,798 (vs. $760)
  • Total interest over 30 years: $377,280 (vs. $51,000 remaining on old loan)

Option 2: Home Equity Loan / HELOC

How it works: You keep your first mortgage and take out a separate second loan.

Tax treatment: Interest is deductible only if the loan proceeds are used for substantial improvements to the home securing the loan. The deduction is subject to the same $750,000 total debt cap.

Advantages:

  • Preserves your low-rate first mortgage (critical if you're locked into a 3-4% rate from 2020-2021).
  • Lower closing costs (typically $500-$2,000 vs. 2-6% for a refi).
  • Shorter terms (5-15 years) mean you pay less total interest, even at slightly higher rates.

Example Math:

  • Borrow $75,000 via home equity loan at ~8.18% over 15 years
  • Monthly payment: ~$717
  • Total interest paid: $54,060
  • Compare to adding $75,000 to a 30-year refi at 7%: ~$104,500 in interest

Quick Comparison Table

FactorCash-Out RefinanceHome Equity Loan
Tax DeductionOn all interest if cash used for improvementsOn interest if proceeds used for improvements
Preserves Low Rate?No—you lose your existing rateYes—first mortgage untouched
Closing Costs2-6% of loan amount$500-$2,000 (often lower)
Interest RateUsually lower (first lien)Usually higher (second lien)
Best ForLarge amounts + rate arbitrageSmaller amounts + keeping low rate

New for 2026: Mortgage Insurance Premiums Now Count as Interest

The OBBBA "Icing on the Cake"

The One Big Beautiful Bill Act treats private mortgage insurance (PMI) payments as mortgage interest for tax purposes.

What this means:

  • If you itemize deductions, you can now deduct PMI payments as part of your mortgage interest deduction.
  • This applies to PMI on both first mortgages and, presumably, home equity loans (if the loan requires PMI).
  • Subject to the same overall limits and phase-outs as before.

Tax Tip: If you put less than 20% down on a refinance or have PMI on a home equity loan, track those payments—they now boost your deduction.

Step-by-Step: How to Calculate Your Tax Savings

A high-angle photograph on a light wooden desk, showing a printout with the title "TAX DEDUCTION CHECKLIST" and four numbered steps: 1. Loan Purpose (Identify Loan), 2. Total Debt (Determine Limits), 3. Calculate Interest (Check Statement), and 4. Itemize vs. Standard (Determine Best Option). Next to the list is a blank IRS Form 1098 Mortgage Interest Statement with an ink pen, a Casio calculator, and a small potted succulent. The checklist has a readable and blurred slight blurring.

Step 1: Determine Your Loan Purpose

  • [ ] Will the borrowed funds go toward substantial improvements (additions, renovations, replacements)?
  • [ ] If NO → Stop. Interest is NOT deductible.

Step 2: Check Your Total Debt

  • Add your first mortgage balance + new home equity loan amount.
  • Is the total under $750,000? (Under $375,000 if MFS)
  • If YES → All interest may be deductible (subject to use test).
  • If NO → Only interest on the portion up to $750,000 is deductible.

Step 3: Calculate Deductible Interest

  • Obtain your Form 1098 from your lender(s) showing interest paid.
  • If you used loan proceeds for both improvements AND personal expenses (e.g., $50K for kitchen + $20K for debt payoff), you must allocate the interest.
  • Example: If 71% of the loan went to improvements, 71% of the interest is deductible.

Step 4: Itemize vs. Standard Deduction

  • 2026 standard deduction: ~$15,000 (single), ~$30,000 (MFJ).
  • Add up: Mortgage interest + property taxes (SALT capped at $10,000) + charitable donations + PMI.
  • If total exceeds standard deduction, itemize. If not, take the standard deduction (but energy credits are gone anyway).

Real-World Scenarios

Scenario A: The Rate-Locked Homeowner

A friendly illustration of a smiling couple standing in a warm kitchen. They are holding blueprints and looking hopeful. A thought bubble above the woman's head shows an "APPROVED" home equity loan document. A transparent thought bubble above the man's head shows a mortgage statement with the text "CURRENT RATE: 3.5%." The kitchen is cozy and filled with plants.
  • Situation: 3.5% mortgage from 2021, need $60,000 for kitchen remodel.
  • Best Move: Home equity loan. Keep the 3.5% first mortgage. Interest on the $60K is deductible if used for remodel.
  • Tax Impact: ~$4,900 annual interest × 24% tax bracket = ~$1,176 annual tax savings (if itemizing).

Scenario B: The High-Rate Refinancer

A professional digital illustration of a man sitting at a desk with a serious expression, reviewing documents labeled "Mortgage Statement" and "Loan Refinance Options." In the background, a calendar shows the year "2026" and a line graph displays declining interest rates. A calculator on the desk compares an "Old Rate: 6.8%" to a "New Rate: 6.5%," while a thought bubble shows a "Consolidated Mortgage Payment" of "$2,150.00."
  • Situation: 6.8% mortgage from 2023, need $100,000 for addition. Current rates are ~6.5%.
  • Best Move: Cash-out refinance. Rates are slightly lower, and consolidating simplifies payments.
  • Warning: Must use funds for improvements to deduct all interest.

Scenario C: The Solar Dreamer (Too Late)

A digital illustration of a woman standing on a rooftop with solar panels, looking at a dramatic sunset over a suburban neighborhood. In the foreground, a desk calendar shows the year "2026" and a sad face icon. Overlaid is a large, weathered stamp reading "30% Federal Tax Credit EXPIRED" in red. A small blue button in the corner states "State Rebates Available – Check Locally."
  • Situation: Planning $30,000 solar installation in 2026.
  • Reality Check: Section 25D credit expired 12/31/2025. No federal tax credit available.
  • Alternative: Check state/local rebates. Financing via home equity loan may still offer interest deduction if you itemize.

Documentation: What the IRS Requires

A neat, organized flat lay photograph taken from a slightly elevated angle, spread across a light-colored wood desk. In the center, a beige file folder labeled "LOAN DOCUMENTS" is closed and marked with a green checkmark. To the right, a stack of diverse paper receipts for home improvement items (labeled "Home Depot," "Lowe's," etc.) is held together by a metal paperclip and marked with a green checkmark. In the bottom left, an official IRS Form 1098 ('Mortgage Interest Statement' for 2026) is clearly displayed with all fields filled and marked with a green checkmark. Beside the Form 1098, to the right, sits a small black digital compact camera (representing photos) with a strap, also marked with a green checkmark. Bright, natural daylight illuminates the scene, and each element is in sharp focus. The photograph has a natural grain and a professional composition.

To defend your deduction in an audit, keep:

  1. Loan documents showing the loan is secured by your home
  2. Receipts and invoices for all improvements
  3. Contracts with contractors describing the work
  4. Photos of before/after (helpful but not required)
  5. Form 1098 from your lender(s)

Warning: The IRS requires proof that materials meet efficiency standards for any remaining state-level credits. For federal purposes, focus on proving the funds went to improvements.

Frequently Asked Questions

Q: Can I deduct interest on a HELOC used to buy a second home? A: No—unless the HELOC is secured by the second home AND used to improve THAT home. Using equity from Home A to buy Home B is not deductible.

Q: I have a mortgage from 2016 ($800,000 balance). Can I deduct all the interest? A: Yes—mortgages taken out before Dec. 16, 2017, are "grandfathered" under the $1 million cap, not the $750,000 limit.

Q: Are there any energy credits left for 2026? A: For residential homeowners, no. Sections 25C and 25D expired 12/31/2025. Builders still have Section 45L through June 2026, and commercial buildings have Section 179D through June 2026.

Q: What's better for taxes—refi or home equity loan? A: Tax treatment is identical if funds are used for improvements. The decision should be based on interest rates, closing costs, and whether you want to disturb your existing mortgage.

Q: Can I deduct points paid on a home equity loan? A: Yes—points paid on a loan to improve your main home are generally deductible in the year paid, assuming the loan is for improvements.

The Bottom Line

2026 brings a mixed bag for homeowners.

The good news: The tax deduction for home equity loan interest remains available—but only if you use the money to improve your home. And thanks to the OBBBA, PMI payments now count as interest, potentially boosting your deduction.

The bad news: The generous energy efficiency credits that saved thousands on windows, doors, HVAC, and solar are gone for new installations.

Before you borrow, run the numbers. Compare cash-out refi vs. home equity loan based on your existing rate, your needs, and your tax situation. And if you missed the 2025 deadline for energy upgrades, focus on state incentives and the still-valuable interest deduction.

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Focus Keyphrase: "Home equity loan tax deduction 2026" • Slug: /home-equity-loan-tax-deduction-2026/

*Last updated: March 2026*

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