When Is a Home Equity Loan Not Tax Deductible?
A home equity loan, sometimes referred to as a "second loan," allows you to borrow money from your equity, which is the value of your home minus the amount of loans against it. Home equity loans may be used for any purpose and usually offer lower interest rates than unsecured loans, like credit cards. In addition, some of the interest may be tax deductible, but not in all cases.
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Amount
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As of 2010, only the interest on the first $100,000 ($50,000, if married filing separately) of your home equity loan can be deducted. For example, if your home equity loan has a balance of $200,000, you would be able to deduct half of your interest only.
Itemize Deductions
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In order to claim the interest from your home equity loan on your taxes, you must itemize your deductions. If you decide to take the standard deduction instead, you cannot claim your home equity loan interest.
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Other Debt
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You cannot deduct interest on the portion of your home equity loan that exceeds the fair market value of your home minus any mortgages or other debt that uses your home as collateral. For example, if your home's value equals $200,000 and you have a $180,000 mortgage and a $45,000 home equity loan, you would be able to deduct the interest on only $20,000 of your second loan.
Exception
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If you borrowed from your home equity to buy, build on or improve your property, then all of the mortgage interest may be deducted, if the total amount of loans that you carried on the home were $1 million or less.
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