Did you know that since 2018, the IRS has effectively blocked small business owners and homeowners from deducting interest on up to $100,000 of home equity debt used for anything other than "buying, building, or substantially improving" their residence? This restriction, introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, shifted the financial landscape for millions of self-employed professionals who previously used their homes as a low-cost source of capital for debt consolidation or personal expenses. According to the IRS Statistics of Income (SOI) Bulletin, the number of taxpayers claiming the home mortgage interest deduction dropped from 32.2 million in 2017 to approximately 13.1 million in 2018 following the TCJA implementation. However, a massive shift is on the horizon. On January 1, 2026, the TCJA provisions are scheduled to sunset, "resurrecting" a powerful tax strategy that hasn't been fully viable for nearly a decade. For the proactive business owner, understanding the return of the $100,000 home equity indebtedness deduction is the key to significant tax savings in the coming years.
Source: IRS.gov - SOI Tax Stats
Key Takeaways
- The 2026 Sunset: Most TCJA provisions expire on Dec 31, 2025, reverting the tax code to pre-2018 rules for home equity debt.
- $100,000 Threshold: Taxpayers will once again be able to deduct interest on up to $100,000 of "home equity indebtedness" regardless of how the funds are used.
- Acquisition Debt Limits: The cap for deductible mortgage interest on primary/secondary residences will revert from $750,000 back to $1 million.
- Strategic Timing: Business owners should evaluate restructuring high-interest personal or business debt into HELOCs starting in late 2025.
- Interest Tracing: Detailed record-keeping remains essential to distinguish between acquisition debt and home equity debt for IRS compliance.
The Great Reversion: Why 2026 Changes Everything
For the past several years, our team at Zenith Financial Advisors has had to deliver the same news to clients: if you used your Home Equity Line of Credit (HELOC) to pay off a high-interest credit card, fund a child’s education, or purchase a vehicle, that interest was non-deductible. Per IRS Publication 936, the TCJA suspended the deduction for home equity indebtedness for tax years 2018 through 2025 unless the loan was used to improve the home that secures the loan.
As we approach the 2026 tax year, the "old" rules under Internal Revenue Code (IRC) Section 163(h) are set to return. This means the distinction between "acquisition indebtedness" and "home equity indebtedness" becomes vital again. Under the pre-TCJA rules, you could deduct interest on up to $1 million of debt used to buy or improve your home, plus interest on up to $100,000 of home equity debt used for literally anything else. For a small business owner, this means you can once again leverage your home’s value to provide a tax-advantaged safety net for personal financial needs.
According to the Federal Reserve Bank of St. Louis (FRED), total home equity in the United States reached a staggering $32.7 trillion in late 2023. This represents a massive pool of potential liquidity that has been "tax-trapped" for personal use since 2018. When the law reverts, the ability to deduct interest on the first $100,000 of this debt (or $50,000 if married filing separately) provides a direct reduction of taxable income on Schedule A. For those in the 32% or 35% tax brackets, this could equate to thousands of dollars in annual tax savings.
Source: FRED Economic Data - St. Louis Fed
Comparing the Rules: 2025 vs. 2026
To help you visualize the shift, it is helpful to look at the specific thresholds that will change. The transition from the TCJA era to the post-TCJA era is not just about the HELOC; it is about the total amount of debt the IRS recognizes as "qualified residence interest."
| Provision |
2024-2025 (TCJA Rules) |
2026 (Reverted Rules) |
| Acquisition Debt Limit |
$750,000 |
$1,000,000 |
| Home Equity Debt ($100k) |
Only if for home improvements |
Deductible for ANY purpose |
| Standard Deduction |
High ($29,200 for MFJ in 2024) |
Likely halved (adjusted for inflation) |
The reduction in the standard deduction is actually what makes the HELOC resurrection so powerful. According to the Tax Foundation, the TCJA nearly doubled the standard deduction, which led many people to stop itemizing entirely. When the standard deduction drops in 2026, more taxpayers will find that itemizing on Schedule A—including that $100,000 of HELOC interest—is once again the most tax-efficient path forward.
Interest Tracing: The Critical Compliance Factor
While the return of the $100,000 deduction for any use is exciting, business owners must remain vigilant about "Interest Tracing Rules" under Treasury Regulation §1.163-8T. This regulation dictates how interest is allocated based on the use of the loan proceeds. Even though the 2026 law allows for personal use deduction, the way you document the flow of funds determines whether the interest is deducted on Schedule A (Personal) or Schedule C (Business).
As experts in cross-border tax planning, we often see business owners co-mingle funds. If you use a HELOC to fund a business expansion, that interest is generally deductible as a business expense, which is "above-the-line" and usually more valuable than an itemized deduction. However, if the HELOC is used for a mix of a new roof (home improvement), a family vacation (personal), and a new piece of equipment (business), you must have a clear paper trail.
The IRS requires that you "trace" the debt to the specific expenditure. Per official IRS guidance in Publication 535, if you don't maintain separate accounts or clear records, the IRS may recharacterize your interest in the least favorable way during an audit. For our clients, we recommend a "one loan, one purpose" approach to simplify the reporting on Form 1098 and ensure that when the $100,000 "any purpose" limit returns in 2026, you are maximizing the personal deduction without jeopardizing your business expense claims.
PRO TIP: The "Bridge" Strategy
If you are planning a major personal expenditure in 2025, consider using a short-term high-interest loan or margin loan, then refinancing that debt into a HELOC on January 1, 2026. This allows you to "wait out" the sunset of the TCJA restrictions and begin deducting the interest the moment the law changes, effectively converting non-deductible 2025 debt into deductible 2026 debt.
Cross-Border Considerations for Expats and Dual Citizens
For the clients we serve at Zenith Financial who have interests in both the U.S. and Canada, the 2026 resurrection of the home equity deduction adds a layer of complexity. Unlike the U.S., the Canada Revenue Agency (CRA) does not allow a deduction for mortgage interest on a principal residence for personal use. However, Canada allows for the deductibility of interest if the borrowed funds are used for the purpose of earning income from a business or property (the "Smith Maneuver" is a common Canadian strategy leveraging this rule).
Per the U.S.-Canada Tax Treaty, U.S. citizens living in Canada (expats) are still subject to U.S. tax on their worldwide income. This means a U.S. expat in Toronto with a HELOC on their Canadian home can benefit from the 2026 U.S. tax law change. Even if the interest isn't deductible on their Canadian T1 return, it will be deductible on their U.S. Form 1040, Schedule A, potentially reducing their U.S. tax liability or increasing their Foreign Tax Credit (FTC) carryovers.
It is important to note that the IRS considers a "qualified home" to be your main home or a second home. This second home can be located outside the U.S., provided it meets the requirements of a residence (e.g., has sleeping, cooking, and toilet facilities). Therefore, the $100,000 HELOC resurrection is a global strategy for U.S. taxpayers, not just those with domestic real estate. We highly recommend reviewing your expat tax strategy before the 2026 deadline to ensure your foreign mortgage is structured correctly.
Common Mistakes to Avoid
- Exceeding the $100,000 Limit: Many taxpayers assume all HELOC interest is deductible. In 2026, the limit is strictly $100,000 of total home equity indebtedness. If your HELOC balance is $150,000 and it wasn't used for home improvements, only the interest on the first $100,000 is deductible.
- Ignoring the 1098 Discrepancy: Banks often report the total interest paid on Form 1098 but don't know how you used the money. It is your responsibility (and ours as your advisors) to calculate the deductible portion accurately.
- Failing to Itemize: The HELOC deduction is an itemized deduction. If your total deductions (mortgage interest, SALT up to $10,000, charitable gifts) don't exceed the new, lower standard deduction in 2026, the HELOC deduction provides no benefit.
- Poor Record Keeping for Business Use: If you use your HELOC for business, don't just dump it into Schedule A in 2026. Business interest is often more valuable as it reduces Self-Employment Tax. Use Form 4562 or Schedule C as appropriate.
Frequently Asked Questions
Will I need to get a new HELOC in 2026 to qualify?
No. The law applies to the interest paid during the tax year, regardless of when the loan was originated. Existing HELOCs that were previously non-deductible for personal use will automatically become eligible for the deduction on January 1, 2026.
What if I use the money for my business?
If you use HELOC funds for business purposes, the interest is already deductible under current (2024-2025) law as a business expense. The 2026 change specifically "resurrects" the deduction for personal use of those funds, such as paying off a personal car loan or credit card.
Is there a limit on how many homes I can use for this?
You can deduct interest on debt secured by your "qualified residence," which includes your primary home and one other designated second home. The $100,000 limit is a total aggregate across both properties.
Does this change the SALT cap?
While the $100,000 HELOC deduction is returning, the $10,000 State and Local Tax (SALT) deduction cap is also scheduled to sunset in 2026. This means taxpayers in high-tax states will have even more reason to itemize, making the HELOC deduction even more impactful.
Maximize Your 2026 Tax Strategy
Don't wait until the 2026 tax season to start planning. Our cross-border and small business specialists can help you restructure your debt today to ensure you're positioned for maximum savings the moment the law changes.
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