A home equity line of credit (HELOC) is a useful tool for investors wanting to upgrade their property or use the funds to buy a new property. However, the tax laws surrounding HELOC interest are often misunderstood.

With a spotlight on IRS regulations, we dig into how you can benefit from these deductions in this article. We provide a clear roadmap to understanding how HELOC interest deductions apply to rental properties so you can make every penny count. 

Is HELOC interest for rental properties tax deductible?

From 2018 through 2025, the IRS treats interest paid on HELOCs or home equity loans secured by your primary or secondary homes as potentially deductible — but with a catch.

The deduction only applies if you utilize the loan proceeds to buy, build, or substantially improve the rental property. This provision allows real estate investors to use HELOCs strategically for their rental properties. You can use the borrowed funds to enhance your property’s value or functionality while adhering to the IRS criteria for tax deductions.

For tax years after 2025, this stipulation is scheduled to be eliminated. That means in 2026 and beyond, the interest paid may still qualify for a deduction even if you allocate the loan proceeds toward general operating expenses, repairs and maintenance, or consolidating business debts.

How to claim a HELOC interest deduction

Claiming a HELOC interest deduction for your rental property goes more smoothly when you take a systematic approach. This way, you comply with IRS guidelines while maximizing your tax benefits. Here’s a step-by-step guide to navigating this process effectively.

1. Segregate use of funds

First, confirm that the HELOC funds were used exclusively for the purchase, construction, or significant improvement of your investment property. Doing so is crucial for claiming the deduction.

2. Document loan and expenditure details

Keep a detailed loan record specifying how the HELOC was secured against the rental property and illustrating that you spent the borrowed funds on eligible improvements. This documentation should include bank statements, invoices, and receipts corresponding to the HELOC.

3. Save Form 1098

If your lender provides you with a Form 1098 Mortgage Interest Statement showing the interest paid in a year, keep this form with your tax records. Although you won’t necessarily submit this form with your tax return, it’s essential evidence of the interest you paid.

4. Report on Schedule E

On your tax return, report the interest paid on your rental property’s HELOC on Schedule E (Form 1040). Schedule E is specifically designed for reporting income and expenses related to rental real estate.

5. Keep detailed tax records

Hold on to all relevant tax documents for at least 7 years, including Schedule E filings, receipts, loan agreements, and Form 1098. This retention period helps protect you in the event of an IRS audit.

Other tax benefits and deductions for rental property owners

Owning a rental property opens up a host of tax benefits that can significantly reduce your taxable income and increase your investment’s profitability. From depreciation to operating expenses, the IRS allows landlords to deduct various costs associated with managing and maintaining rental properties:

• Advertising: You can deduct the cost of marketing your rental property, including online listings, print ads, and signage.
• Auto and travel: Traveling expenses related to property maintenance or inspections are deductible. Keep logs of mileage and costs for the most accurate deductions.
• Cleaning and maintenance: Regular upkeep and cleaning services to maintain your property can be deducted, contributing to tenant satisfaction and property value.
• Commissions: If you pay a real estate agent or a property manager a commission, this cost is fully deductible.
• Depreciation: Beyond immediate expenses, property depreciation and improvements over the rental’s useful life offer a substantial deduction without impacting your cash flow.
• Insurance: These deductions include premiums for landlord liability, property insurance, and mortgage insurance.
• Legal and professional fees: Fees for attorneys, accountants, and property management services are considered deductible expenses as long as they’re incurred in the name of your rental activity.
• Management fees: If you employ a property manager, which frees up your time while ensuring professional oversight of your investment, their fees are a deductible expense.
• Mortgage interest: Interest on any loans taken out to purchase or improve your rental property remains one of the most significant deductions.
• Repairs: Immediate repairs required to keep your property in good working order, such as fixing leaks, painting, and repairing appliances, are deductible.
• Supplies: You can deduct the cost of supplies purchased for the property’s maintenance and operation, encompassing everything from light bulbs to cleaning products.
• Taxes: Property and sales taxes attributable to your rental activity are deductible.
• Utilities: If you pay for utilities and are not reimbursed by tenants, these costs are deductible. That includes electricity, gas, water, and sewer expenses.

Maximize your tax deductions with Stessa

Ready to maximize the returns of your rental property investments and discover a world of tax benefits?

Check out Stessa. You can simplify your property management with our easy-to-use platform, designed to save you time and money while maximizing returns. Scan and store receipts to effortlessly track your expenses and use the platform’s built-in Schedule E reports to optimize your tax deductions. 

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