Is HELOC Interest Tax Deductible in California?
California's tax law for HELOC interest differs significantly from federal rules. Understand how this distinction affects your state deduction possibilities.
A Home Equity Line of Credit, or HELOC, is a revolving line of credit secured by your home that functions similarly to a credit card. Homeowners often use these funds for major expenses like home renovations, debt consolidation, or education. The rules for deducting HELOC interest depend on both federal and state tax laws, and understanding the differences between IRS regulations and California’s tax code is required to claim available deductions.
Federal Rules for HELOC Interest Deduction
The Tax Cuts and Jobs Act of 2017 (TCJA) changed the federal rules for deducting HELOC interest. For the interest to be deductible on a federal return, the borrowed funds must be used to “buy, build, or substantially improve” the home securing the loan. This means using the HELOC for a new addition or a major kitchen renovation would qualify.
Using HELOC funds for personal expenses, such as paying off credit card debt, covering tuition, or buying a car, makes the interest non-deductible under federal law. The loan must also be secured by your main or second home, known as a qualified residence.
There are also specific debt limits. For tax years 2018 through 2025, total home-related debt, including a primary mortgage and HELOCs, cannot exceed $750,000 for those married filing jointly, or $375,000 for married individuals filing separately. Mortgages taken out before December 16, 2017, are grandfathered under the previous $1 million limit. If your debt exceeds these caps, you can only deduct interest on the portion within the limit.
California State Rules and Adjustments
California’s approach to HELOC interest deductions differs from the federal government’s because the state did not conform to the TCJA. The federal rule requiring funds to be used to “buy, build, or substantially improve” a property does not apply for California state income tax. Therefore, interest on a HELOC used for personal debts may be deductible on your state return.
For California tax purposes, the rules revert to pre-TCJA federal standards. This allows taxpayers to deduct interest on up to $1 million of “home acquisition debt” used to improve a home. California law also permits a deduction for interest on up to $100,000 of “home equity debt,” regardless of how the funds are used.
Consider a homeowner who takes out a $50,000 HELOC and uses the entire amount to pay off high-interest credit cards. On their federal return, none of the interest paid on this HELOC would be deductible because the funds were not used to improve the home. On their California state tax return, the interest would be fully deductible, provided their total home equity debt is $100,000 or less.
Required Documentation and Record-Keeping
To substantiate a HELOC interest deduction for federal purposes, you must maintain records that trace the use of the funds. This involves keeping documentation like contractor invoices, receipts for materials, and bank statements that show the transfer of HELOC funds for qualifying expenses.
Your lender will send you Form 1098, Mortgage Interest Statement, which reports the total interest you paid. This form alone is not sufficient for a federal deduction and must be paired with your personal records to prove how the funds were spent.
For California tax purposes, documentation requirements are less stringent since the use of funds for home equity debt up to $100,000 is not a factor. You will still need your Form 1098 and original loan documents. Keeping organized financial records is always a sound practice.
How to Claim the Deduction on Your Tax Returns
On your federal return, the deductible portion of your HELOC interest is reported on Schedule A (Form 1040), Itemized Deductions. You will combine this amount with your primary mortgage interest on the designated line.
The process for your California return requires an adjustment to account for the differences in state law. Federal itemized deductions from Schedule A automatically transfer to your California return. You must calculate the additional amount of interest that is deductible for state purposes but was not allowed on your federal return.
This calculated difference is then reported as a subtraction adjustment on California Schedule CA (540). You will find a specific line for home mortgage interest in the “Adjustments to Federal Itemized Deductions” section.