Home Equity Tax Deductions
When you need to borrow money, you might consider a home equity loan or home equity line of credit. This type of loan offers lower interest rates than unsecured loans, and you may be able to deduct all or some of the interest that you pay on the loan when you file your income taxes.
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Deduction Function
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The Internal Revenue Service defines home equity debt to include any loan taken out that uses your home as collateral, not including loans taken out to buy, build or improve your home. You can use the home equity loan proceeds in any way you want and the interest will still be deductible. For example, you can use a home equity loan for a new auto, a vacation or college costs for your kids.
Size Limits
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Home equity loans face two limitations. You cannot deduct the interest on home equity debt that exceeds the value of your home. For example, if your home is worth $200,000, you have a $170,000 mortgage and you take out a $40,000 home equity loan, you would only be able to deduct $30,000 of home equity debt because the last $10,000 exceeds your home's value. Also, you cannot deduct more than the interest on the first $100,000 of home equity debt ($50,000 if your filing status is married filing separately).
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Claiming Home Equity Interest
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To deduct your home equity interest, you must itemize your income tax deductions. When you itemize, you can't claim the standard deduction and you must use Schedule A. On Schedule A, add your home equity loan interest to any home mortgage interest you will deduct and report the total on Line 10. This amount, plus any other itemized deductions you claim, will lower your taxable income for the year. Once you have totaled your itemized deduction, you transfer the sum to Line 40 of your Form 1040 tax return.
Considerations
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In some cases, the tax benefits of a home equity loan may makes sense for you. For example, if you use a home equity loan for a car purchase instead of a car, you would be able to deduct the interest. However, just because you can write off the interest on home equity debt does not mean you should refinance all of your other debts into a home equity loan. When you take out a home equity loan, your home becomes collateral, and if you fail to make your payments, you could lose your house.
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