Home equity loan interest is tax deductible. You may have heard this before in
advertisements and, indeed, it is true, but there are several restrictions. Make
sure you know these restrictions so that you know exactly what you're getting
into with your
home
equity loan.
What You Can Deduct
With any home equity loan
totaling $100,000 or less, you can deduct all of the interest from your taxes no
matter what you're using the money for. This is the case whether you're taking
out one loan with one property as collateral or if you're taking out multiple
loans with multiple properties as collateral. As long as they total $100,000 or
less when combined, you can deduct all of the interest from your taxes no matter
what you're using the money for.
If your loans total more than $100,000,
you can still deduct interest on $100,000 of the loan, but not on anything more.
So, for a $150,000 home equity loan, the interest on $50,000 would be
non-deductable.
There is an exception, though, if you are using the
loan money for improvements on your property. If this is the case, you can
deduct interest on up to $1 million worth of home equity loans. Improvements
could include:
- Building a house or other permanent structure on your property
- Purchasing an additional property like a second home
- Putting an addition on your home
- Remodeling your home
For example, if your home is worth $500,000
and you borrowed enough for a $200,000 addition, the interest on the entire loan
would be tax deductible. This would not be the case if your property was already
worth $1 million; you can only deduct an amount that is under that limit.
Restrictions
Of course, all good things (even tax deductions)
come with asterisks. If your home equity loan, combined with your first
mortgage,
increases you're debt to more than the market value of the property, only a
portion of the loan will be tax deductible.
In that case, the deductible
amount is determined by subtracting the amount of the first mortgage from the
property's fair market value. Say your property is currently worth $140,000, but
you only needed a $100,000 loan to purchase it. If you got an over equity loan
of $90,000, the property would only be worth $40,000 more than the original
loan, so just $40,000 would be tax deductible.
As always, you should
make sure you read all of the fine print when applying for a home equity loan.
It's also a good idea to ask an accountant or tax expert for advice. You should
be well aware of exactly what you're getting yourself into so that you can be
sure you're getting the best deal and that you'll be able to afford to pay back
your loan.
TIP: For more information on over equity loans,
check out our guide entitled "Over Equity
Loans."