Is home equity loan interest tax deductible in California?

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When it comes to navigating the world of taxes and personal finance, things can feel a bit hazy to understand. One question that pops up for homeowners looking to tap into their equity in the Golden State is can I deduct mortgage loan interest on my taxes?

The short answer is yes — 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 substantially 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.

LEARN MORE: How do home equity loans work: Rates, terms and repayment

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 like furniture and home decor are not eligible for this mortgage interest deduction in California or anywhere else in the United States.¹

Discover® Home Loans offers low, fixed rates on home equity loans with $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing.

Mortgage interest deduction limits

According to the Tax Cuts and Jobs Act (TCJA) 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

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 Palm Springs, 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 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.

Is home equity line of credit (HELOC) interest tax deductible in California?

Since they are another type of mortgage debt, the same rules and limits set by the TCJA may apply to HELOCs. It’s advisable to consult with a tax professional to understand the specific tax implications based on your individual circumstances.

When is home equity loan interest non-deductible?

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.

Where to go next

Are you planning to make major upgrades to your home this year? Consider taking out a fixed rate home equity loan with Discover.
Home improvements are just one reason to tap into your home equity — you could potentially benefit from debt consolidation.
Looking to refinance your primary mortgage and access cash from your equity? Learn more about cash out refinance tax implications.

Please note: Discover® Home Loans offers home equity loan and mortgage refinance opportunities but does not offer purchase mortgages or HELOCs.

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