The interest on a home equity loan or line of credit can be tax deductible, which many people find to be a strong positive point to taking advantage of these products. Tax deduction on interest doesn’t beat paying no interest at all, but if that’s not a possibility, this is a good alternative. There are some things to look out for if you are able to deduct the interest on your loans. First of all, if you don’t itemize your deductions, you won’t be able to deduct home loan interest. On the other hand, it’s often the mortgage or loan interest that will allow itemization for people who wouldn’t qualify otherwise.
Here are some warnings from eHow:
The yearly limit on the deduction for home equity loan interest is the interest on loans totaling $100,000 ($50,000 if married filing separately). If you used all or part of the loan for your business, it might be better to elect to treat the debt as unsecured by your residence. In that way, you can write off the interest as a business expense. But once you make the election, you can’t reverse it without Internal Revenue Service approval.
You cannot deduct interest on any amount of the home equity loan that is more than the difference between the market value of the home and your mortgage debt.
David Bach points those looking for more information to the IRS Publication 936.
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10:37 am (reply)
I never quite understand the ‘its good for taxes’ arguments on mortgage products. I agree with you that staying out of debt is the best choice.
4:54 pm (reply)
This is a little misleading. The $100,000 limit on home equity debt does not apply if the money is used for home acquisition or home improvement.
It’s also important to note that HELOC or second mortgage debt that doesn’t qualify as home acquisition debt is not deductible at all if you are subject to AMT.