Moving Your Debt to Deductible Interest

4 July, 2013

I fielded a question from a client last week about whether interest paid on a line of credit on his home was deductible on his income taxes.   Given how we’re now in a time of record low mortgage rates, I thought this was worth passing along.

I’m old enough to remember when interest on auto loans and credit cards was deductible, but that went bye-bye some years ago.  Too bad.  But if you get a line of credit, secured by your home, the interest will be deductible.  This makes sense for some homeowners who need to finance a new car or want to pay off their credit cards.  It’s especially effective if the credit cards are cut up at the same time.

There are some kinks, however, that you need to be aware of:

                *  Tapping into your home equity, the loan amount can’t be over $100,000 in order to take the deduction.  And it doesn’t matter if the loan is against your primary residence or multiple loans up to $100,000 secured by two different homes.  The money can be used for any purpose.

                *  There’s also a deduction restriction tied to the value of your property:  if your loans amount to more than what your property is worth, the interest up to the home value amount is deductible.  For example, let’s say you want to get a line of credit for $100,000 to help pay for your daughter’s college expenses.  If your home is valued at $200,000 and your first mortgage is $120,000, the interest on $80,000  of equity will be deductible ($120,000 first + $80,000 credit line equals the $200,000 home value).   The interest on the remaining $20,000 line of credit won’t be deductible.

                *  If you’re doing home improvements, then you’ll hit the deduction jackpot.  Referred to as acquisition indebtedness, your line of credit interest will be treated like your first mortgage interest:  it’s all deductible, up to $1 million

So, get out there and do what you need to do.  It’ll probably improve your (or your family’s) future, and will help the economy.  Good luck!  Until next time, here’s to good planning!   http://www.MoneyTipsOnline.com

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