Home Equity Loan Interest -
Understanding Tax Deductibility |
By Maria Ny |
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Home equity loans (second mortgages) and equity lines of credit (HELOCs)
are popular ways for homeowners to consolidate debts or to make home
improvements on their primary residences, especially if they don't
want to refinance because their first mortgage rates are low.
Mortgage refinancing can also be expensive, making second mortgages
and home equity lines much more attractive options.
Second
mortgages are also popular as "piggy back" loans to help finance
down payments if the home-buyer doesn't have a lot of cash on hand,
and for purchasing a second home. Many people are drawn to the tax
advantages that second mortgages and HELOCs offer, especially since
many states allow a 100% deduction on the interest paid on mortgage
loans. However, there are certain limitations to second mortgage and
HELOC tax deductibility.
According to Wells Fargo Bank,
interest payments are usually fully deductible on:
Up to $1
million (up to $500,000 if married filing separately) in mortgage
debt (acquisition debt).
Mortgages secured by your primary
residence or second home.
Mortgages used to buy, build, or
improve your primary residence or second home.
Home equity
loans and lines of credit, if total amount of home equity debt on
your main and second homes does not exceed $100,000 ($50,000 for
married filing separately) and the total outstanding mortgages
against the collateral property does not exceed 100% of the fair
market value (FMV) of the property.
IRS Publication 936
states that interest on amounts over the home equity debt limit
generally is treated as personal interest and is not deductible. But
if the proceeds of the loan were used for investment, business, or
other deductible purposes, the interest may be deductible. |
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