Facts About the Home Equity Loan Interest Deduction
Homeowners who need some extra money may use the equity in their home to secure a home equity loan, also known as a home equity line of credit (HELOC).
One of the advantages of this type of loan is that the homeowner may be able to get a tax deduction on the interest they pay on this loan. There are some restrictions, however, and thus it pays to understand the tax laws on home equity loans before getting such a loan.
Deducting Interest on a Mortgage Loan
A tax deduction may be claimed on interest of a home equity loan that is secured by either a first or second home. Homeowners who have multiple homes or who have mortgages that exceed a home’s value need to check the details on what deduction they are allowed as stated in the IRS laws in IRS Publication 936 Section 1.
Tax laws are fairly complex and also change quite often so you need to stay up-to-date to make sure any mortgage interest deduction you claim is legal. In addition it is always good to consult with a reputable tax advisor as the relatively small cost of professional advice is usually well worth the expense. That being said, it is not difficult to read the specific laws about home equity loan tax deductions and gain a general understanding of how they work.
Saving Money by Deducting Mortgage Interest
Deducting mortgage interest can save a homeowner a substantial amount of money. For example if you are paying interest on debt you owe and you get a second mortgage as part of a debt consolidation program, then the interest you will pay will not just be an expense but will now be tax deductible.
In this situation a homeowner should evaluate all of the numbers involved including the amount of the debt, the amount of the loan, the interest and the tax deduction to evaluate whether it is a good idea.
Limitations on Home Equity Loan Tax Deductions
Since tax laws change you need to evaluate the rules at the time you get your home equity loan. Generally speaking the interest you pay on the first $100,000 of a home equity loan is tax deductible.
Beyond $100,000 various factors need to be considered. For example if the loan was used for home improvements (e.g., remodeling) on either your first or second home, or if it was used to buy a second home then the tax deduction on the interest may be available on loan amounts up to $1 million or the total value of the home.
See Section 2 of IRS Publication 936 for more details on this tax law. All tax laws are explained at the IRS website www.irs.gov.
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