Home Equity Loans: How They're Handled at Tax Time

By Kelly Richardson
LoanPage.com Columnist

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One of the best reasons to take out a home equity loan is that the Internal Revenue Code allows many people to deduct all or part of the interest they pay on these loans. Here's what the IRS allows you to deduct on home equity mortgage interest.

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Many homeowners don't understand the possible tax advantages of a home equity loan or line of credit. The IRS has constructed a series of tax rules that generally allow homeowners to deduct a portion or all of the interest paid on the loan. This can add up to a substantial savings per year.

Taxing Home Equity Loans

  • » Non-deductible Interest. Loans for cars and credit cards--those with non-deductible interest--can be moved to a possibly tax-deductible mortgage loan secured by your home. The tax deductions will effectively lower what you're paying on top of the savings realized by obtaining a lower rate on this debt.
  • » The Restrictions. When it comes to a home equity loan, you can deduct the interest that you pay up to $100,000. This is done on the Schedule A tax of your 1040 as long as you itemize your deductions. Interest on mortgage amounts that exceed the value of your property is not deductible unless it falls under one of the exceptions granted by the IRS. That's why most lenders suggest that you consult a tax advisor about the deductibility of home mortgage interest, especially on home equity loans.
  • » Acquisition Indebtedness. If you plan to refinance your mortgage to add to its value, you can deduct interest on $1 million worth of first mortgage debt. This may be the perfect home equity loan for renovating your home.
Check with your tax specialist before you close on your home equity loan. He or she can advise you on the best way to get preferential treatment in April.

Sources
Bankrate
Mortgage News Daily

About the Author
Kelly Richardson covers the real estate scene in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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