How to Allocate Home Equity Interest

You can only allocate the home equity interest as tax deductible up to your total equity in the house.

When you purchase a home, its total value is split between the amount that you own and the amount that is still under mortgage and must be paid off. The equity in the home is the difference between the purchase price and the mortgage amount. You are allowed to take a home equity loan from a bank using your house as collateral. The home equity interest payments will be allocated between tax-deductible and non-deductible payments. The amount of home equity interest you can allocate as a deductible payment depends on your total equity in the home and can only be applied to a maximum of $100,000.

Instructions

1. Call your bank or mortgage company and ask for the remaining balance on your home mortgage.

2. Contact an appraiser to find the current fair market value of your home.

3. Subtract the mortgage balance from the fair market value of your home to calculate its current total equity.

4. Allocate the interest payments on your home equity loan that are up to your home equity as tax-deductible payments. Allocate the remainder of the loan interest as non-deductible payments.

   Example: You own a home that has been appraised for $300,000. Your mortgage balance is $220,000. What portion of your $100,000 home equity loan can you allocate as tax-deductible interest?

   Home equity = fair market value - mortgage

   = $300,000 - $220,000

   = $80,000

   You are able to deduct the interest from $80,000 of the $100,000 loan. The rest of the interest will not be tax deductible.

Tips & Warnings

• Remember, only $100,000 of home equity interest can be deducted even if your total equity in the home is over $100,000.

References

• "Fundamentals of Income Taxation"; James Ivers III, et al.; 2010
• Bankrate.com; Home equity loan interest is deductible -- to a point; Michael Larson