Last updated: July 14, 2023

Market Insights

Is home equity loan interest tax deductible in California?

Woman researching is her home equity loan interest tax deductible in California on her laptop

If you’re a homeowner in California with equity in your home, a home equity loan may allow you to deduct the interest paid on the loan when you use the funds to improve your home.1

When trying to deduct your home equity loan interest charges, you will need to provide receipts and documentation showing that the funds from your home equity loan were used to pay for your home improvements.

While the information below outlines scenarios where a tax deduction for interest from a home equity loan may be possible in California, consult with a tax advisor for advice on how this may apply to you.

When is home equity loan interest deductible in California?

While you can use a home equity loan for many purposes, you’ll generally only be able to deduct interest up to the maximum limit on it if you use it for buying or building a property or for substantially improving your home. Home improvement expenses eligible for the interest deduction may include remodeling your kitchen or bathroom, replacing your roof or siding, building an addition, or finishing your basement. Purchasing items furniture and home decor are not eligible for this mortgage interest deduction in California or anywhere else in the United States.1

According to the Tax Cuts and Jobs Act of 2017, taxpayers may deduct up to $750,000 in home loan interest for homes purchased as of December 16th, 2017 (or up to $375,000 for married couples filing separately). This applies to purchase mortgages as well as home equity loans. If you purchased your home before that date, you may be eligible to deduct up to $1 million in principal mortgage interest (or up to $500,000 for married couples filing separately).1

Woman calculating her home equity loan interest tax deduction in California

One of the most common uses for the funds from a home equity loan is making home improvements.

It’s important to note that the limits apply to your total debt on all the properties you own.1 For example, if you owe $400,000 on your primary home in San Francisco and owe $350,000 on a vacation home in Los Angeles, you may get a mortgage interest deduction in California on the entire amount, unless you are married filing separately. In that case, the limit of $375,000 would apply.

If your primary home is $750,000 and your vacation home is $350,000, the tax break will only be applicable on up to the limits outlined above. In this example, you may not be able to get a California property mortgage interest deduction on your vacation home — or for the full amount of your primary home if married filing separately.

Whether your home loans are primary or secondary mortgages, the tax deduction may be available to you if the mortgage funds are used to buy, build, or make substantial improvements to your home. 

When is home equity loan interest non-deductible in California?

Although it’s common for homeowners to use home equity loans to improve their homes, it’s just as common for them to use them for other purposes. These other purposes may include consolidating high-interest credit card debt, funding a child’s college education, or even going on vacation.

If you take out a home equity loan and use it for a purpose unrelated to home expense, you may not be able to deduct the interest. Here’s why: The Tax Cuts and Jobs Act of 2017 states that interest deductions are not permitted on home equity loans for tax years 2018 to 2026, unless the funds are used to purchase, build, or substantially improve your primary or second home.1

While you may take out a home equity loan to pay for lifestyle expenses, education costs, and big ticket purchases, just keep in mind that if you go this route — this won’t be eligible for a loan interest tax deduction in California. 

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