Is HELOC Interest Tax Deductible in California?

HELOC interest is tax deductible in California in more situations than it is on your federal return. California still lets you deduct interest on up to $100,000 of home equity debt no matter what you spent the money on, while federal law only allows the deduction when the proceeds went toward buying, building, or substantially improving the home that secures the loan. For many California homeowners, that means a HELOC used to pay off credit cards or cover tuition produces no federal deduction but still produces a state one.

What California Allows

California has not adopted the federal mortgage interest changes from the 2017 Tax Cuts and Jobs Act or the One Big Beautiful Bill Act. The state’s conformity to the Internal Revenue Code is fixed at January 1, 2025, under the Conformity Act of 2025, so the pre-2018 rules still govern your Form 540.¹

Two differences matter for HELOC borrowers:

California allows a deduction for interest on up to $100,000 of home equity debt ($50,000 if married filing separately), even when the funds were not used for home improvements.²
California’s cap on home acquisition debt is $1 million ($500,000 if married filing separately), compared to the federal $750,000.²

So a Californian with a $60,000 HELOC draw used to consolidate credit card debt gets no federal deduction on that interest but can deduct all of it on the state return, because the balance sits under the $100,000 home equity limit.

What Federal Law Requires

Federally, HELOC interest is only deductible when you used the proceeds to buy, build, or substantially improve the home securing the loan. The IRS does not care that the debt is secured by your house. It cares what you did with the money.³

“Substantially improve” means work that adds value, extends useful life, or adapts the home to new uses. A new roof structure, an addition, or a new HVAC system qualifies. Routine repairs like painting, patching drywall, or fixing a faucet do not.

Even qualifying improvements run into a cap. Total mortgage debt secured by the home cannot exceed $750,000 for the interest to be fully deductible ($375,000 if married filing separately) for debt taken on after December 15, 2017.⁴ This limit covers your first mortgage and HELOC combined, not each loan separately. The One Big Beautiful Bill Act made these restrictions permanent at the federal level, with no scheduled return to the older rules.⁵

Two Returns, Two Answers: Worked Examples

Because the rules differ, you will often end up with two different deductible amounts for the same loan.

Example 1: HELOC used for a kitchen remodel. You have an $850,000 first mortgage from 2020 and a $75,000 HELOC spent on a kitchen renovation. Total debt is $925,000.

Federally, interest is deductible only on the first $750,000 of combined debt. The HELOC balance sits entirely above that cap, so none of its interest is federally deductible. On the California return, the HELOC counts as acquisition debt because the money went into the home, and the full $925,000 falls under the state’s $1 million limit. All of the interest is deductible at the state level.

Example 2: HELOC used to pay off student loans. Same $850,000 first mortgage, but the $75,000 HELOC paid down student debt. Federally, the HELOC interest is completely non-deductible. In California, the HELOC qualifies as home equity debt, and because $75,000 sits under the $100,000 state limit, the interest is deductible on the state return.⁶

Mixed-Use Draws

Many borrowers draw against a HELOC for different purposes at different times. When that happens, you have to trace each draw to its specific use and split the interest accordingly.

Publication 936 sets out an allocation method: track the balance attributable to each category of debt month by month, then calculate the share of total interest that belongs to each. Principal payments reduce categories in a set order, starting with non-qualifying personal debt first, then grandfathered debt, then acquisition debt.³

In practice, that means keeping a clear paper trail from the first draw. If you take $40,000 in March for a bathroom renovation and $20,000 in July for a vacation, those are separate categories. The $40,000 is potentially federally deductible as acquisition debt; the $20,000 is not federally deductible but may qualify on your California return as home equity debt. Ambiguous draws tend to be treated as personal debt.

Itemizing: Why California Changes the Math

The HELOC interest deduction only helps you if you itemize, and the standard deduction gap between federal and state returns is wide.

The 2026 federal standard deduction is $32,200 for married couples filing jointly and $16,100 for single filers.⁷ California’s is far lower: for the 2025 tax year it was $5,706 for single filers and $11,412 for married filing jointly, with 2026 figures not yet released.

Many California homeowners whose itemized deductions fall short of the federal standard deduction still clear the California threshold easily. You are allowed to make different elections on each return. Taking the federal standard deduction does not prevent you from itemizing in California.

How to Claim It

Your lender will send Form 1098 reporting the mortgage interest you paid for the year. The form does not split interest between acquisition debt and home equity debt. That allocation is on you, and it is where most mistakes happen.⁸

For the federal deduction, file Schedule A with your Form 1040. For California, file Schedule CA (540) to reconcile the difference between the two returns. Interest that is disallowed federally but still deductible under California law goes on Part II, Line 8, Column C.⁶

Keep every receipt, contractor invoice, and bank statement showing where each HELOC draw went. The IRS use-of-funds test makes documentation the whole ballgame on the federal side. California’s home equity deduction is easier to document since the funds do not need to go toward improvements, but you still need to show the debt was secured by a qualified residence and stayed under the $100,000 cap.³

One Catch: California AMT and Investment Use

If you used HELOC proceeds to buy stocks or other investments, California’s Alternative Minimum Tax can erase part of the deduction you would otherwise claim. For AMT purposes, the Franchise Tax Board reclassifies that interest as investment interest, which is subject to separate limitations even if it was fully deductible as mortgage interest on your regular California return.⁹ California AMT is computed on Schedule P (540). If you borrowed against your home to fund a brokerage account, run that calculation before assuming your full state deduction will hold.

1
Franchise Tax Board. California Conformity to Federal Law
2
California Franchise Tax Board. Bill Analysis AB 946
3
Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
4
Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)
5
Tax Policy Center. How Did the TCJA and OBBBA Change the Standard Deduction and Itemized Deductions
6
State of California Franchise Tax Board. 2025 Instructions for Schedule CA (540) – California Adjustments – Residents
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
8
Internal Revenue Service. About Form 1098, Mortgage Interest Statement
9
Franchise Tax Board. 2024 Instructions for Schedule P (540)