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Home Equity Loan Tax Deductions
Interest - is an amount you pay for the use of borrowed
money.
Several lenders are currently offering amazing deals for
125% home equity loans. As highly advertized as these
loans are they don't highly advertize that the interest payments
on these loans are not neccessarily fully tax deductable.
To understand why these interest payments don't qualify as tax
deductable lets look at what is considered a tax deductable
interest payment. The IRS website states that to be
considered for full tax deductable interest your mortgage must
fall into one of these three catagories:
- Mortgages you took out on or before October 13, 1987
(called grandfathered debt).
- Mortgages you took out after October 13, 1987, to buy,
build, or improve your home (called home acquisition debt), but
only if these mortgages plus any grandfathered debt totaled $1
million or less ($500,000 or less if married filing
separately).
- Mortgages you took out after October 13, 1987, other than
to buy, build, or improve your home (called home equity debt),
but only if these mortgages totaled $100,000 or less ($50,000
or less if married filing separately) and totaled no more than
the fair market value of your home reduced by (1) and (2).
As described by the IRS to be considered as home equity
debt the amount of the loan must be equal or less then the
Fair Market Value of your home minus any outstanding debt from
your first or second mortgage up to a loan amount of
$100,000.
For example, your home's fair market value is $150,000 your
outstanding debt or mortgage is $115,000. This means the equity
that you have built from your home is $35,000.
Now your looking to cash in and a lender offers you a 125%
home equity loan, 125% x $150,000 = $187,500 subtract your
outstanding debt of $115,000 and you have qualified for a $62,500
dollar loan. So finally lets divide this loan into two parts.
First $35,000 is your secured home equity debt and $27,500 is
your unsecured home equity debt. The problem lies that as
discussed before the tax exemption for interest payments only
covers the secured home equity debt amount, leaving you with the
financial liability of paying off the interst on $27,500 of your
loan.
*Their is a notable exception in regards to the purpose of the
home equity loan. If the loan is used for home improvement
it can possibly be considered as a "home aquisition debt" and the
interest payments may be deductable for a loan greater then your
actual equity value.
The best course of action is to always speak to a tax advisor
regarding any type of home loan. Being aware of tax deductions
and liabilities can save you a huge headache and possibly
thousands of dollars!
Richard Mccaffery is owner of Home Equity Loan
Lenders, a free content website meant to assist consumers in
finding home equity loan information.
MORE RESOURCES updated Thu. June / 08 / 2023
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