Are you planning a major home improvement like the installation of an in-ground pool or a finished basement? In the past, you may have been entitled to a huge mortgage interest deduction for payments on a home equity loan or similar line of credit. But this deduction is no longer available.
Tax solution: With proper planning, you may be able to squeeze through a tax loophole in the current law. This maneuver allows you to convert nondeductible personal it into deductible mortgage interest!
First, here’s a brief history lesson. Prior to the Tax Cuts and Jobs Act (CJA), enacted during the president’s first term, homeowners who itemized could deduct mortgage interest that qualified as either “acquisition debt” or “home equity debt” within certain limits.
- Acquisition debt: This is a debt where the borrower uses the proceeds to buy, build or substantially improve the home. To qualify for the write-off, the loan must be secured by a qualified residence, such as your principal residence or a second home (e.g., a vacation home.) The interest was deductible on the first $1 million of debt.
- Home equity debt: When permissible by state law, a borrower could deduct the interest on home equity loans secured by a qualified residence, regardless of how the proceeds were used. With a home equity debt, deductions were limited to interest paid on the first $100,000 of debt. Plus, the loan amount could not exceed your equity in the home.
The TCJA lowered the threshold for deducting interest paid on acquisition debt from $1 million to $750,000 for loans originating after December 15, 2017 (April 1, 2018 if a binding contract was in place before December 16, 2017). Even worse, the deduction for interest paid on home equity debt was suspended from 2018 through 2025. Subsequently, this tax break was permanently elim0inated for 2026 and beyond by the One Big Beautiful Bill Act (OBBBA) passed last year.
Nevertheless, despite these legislative crackdowns, you still may be able to deduct mortgage interest paid on a home equity loan or line of credit.
How it works: If you borrow money via a home equity loan or line of credit and use the proceeds for significant home improvements, the debt can be treated as an acquisition debt, instead of a home equity debt. Reason: It counts as a debt incurred to “substantially improve” a qualified residence. Accordingly, you can add this mortgage interest to your deductible total if you itemize deductions.
For instance, suppose you borrow $50,000 on a home equity debt to build a new deck in your backyard. This qualifies as a substantial improvement, so the mortgage interest paid on the loan is deductible as acquisition debt on your personal tax return, subject to the prevailing dollar limit.
In fact, just a small change in the way you handle things can salvage a deduction. Say that you were planning to use funds in a bank account to pay for a substantial home improvement. At the same time, you were contemplating a loan to help pay for your child’s college education. If you switch things around—use the home equity loan for the home improvement and the cash savings for college expenses—the nondeductible interest is converted into deductible interest.
Sound advice: Consult with a tax professional before you put a nail in the wall or a shovel in the dirt. Make sure you are on solid tax ground for claiming deductions if you itemize.
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