If you use a home equity line of credit for personal use, do you know you may be in trouble with the IRS if you plan to claim a deduction for mortgage interest?
Are you confused by what this means to you.
We trust our tax accountants and the media when we are told that interest on the home equity line is deductible for tax purposes. But in some cases this is just not correct.
Do you know when you take a cash out refinance from your home equity line of credit or decide to borrow money against your HELOC, the IRS limits the amount you can deduct for tax purposes, and in this case mortgage interest. In some cases if your home has devalued you won't be able to claim the deduction at all.
Well, the way this is set up, the IRS in general does allow you to deduct interest on your HELOC for tax purposes. They call this the home equity indebtedness deduction.
The home equity indebtedness means:
One of the deductions that the IRS gives you as a homeowner is to claim a mortgage interest deduction of up to $100,000 if you file a joint return. If you file a single or separate return the deduction is limited to $50,000. To make sure that we are specific, I am referring to one aspect of the deduction only and that is when you refinance or borrow more from your mortgage.
Now that you understand the deduction here's how they take it away from you.
Let us look at the following example to see how this works.
Let us assume at the time when you first acquired your home you paid $300,000. But now you only owe a balance of $260,000.
Now assume at this point in time you decide to borrow against your home and take out an additional $30,000 from your HELOC. The key question is, are you allowed to deduct the interest paid on the $30,000 as a mortgage interest tax deduction? Let's make one more assumption that your home is valued at $320,000 the day you decide to borrow money from your HELOC.
You may be in for a surprise. If you previously claimed a deduction or thought of claiming a deduction this year, the IRS may limit your interest deduction lowering your refund.
The best way to figure out what you can deduct is to do a simple calculation. According to the IRS you need to take the value of your home ($320,000) and from this you deduct the cost of your home ($300,000). The difference of ($20,000) is what you are able to claim as an interest deduction. You thought you may claim the entire $30,000 but as you can see the IRS limits this.
Now if the market value of your home has decreased below the cost of your home, you cannot claim interest on any of the $30,000 you borrowed. I have seen hundreds of clients caught up in this potential tax trap and most of them have their taxes completed by their tax accountants. So if you home is worth $290,000 today and the original cost is $300,000, the entire interest you paid on the $30,000 you borrowed cannot be claimed for tax purposes.
How do you know if you are caught up in this tax trap?
Go to the url or the unique links below and gain access to a quick and easy checklist. In this document, we have given you suitable points to consider preventing you from making unnecessary mistakes when filling in your tax return.
I strongly recommend that you contact your tax accountant immediately if you have used your HELOC funds for personal use in the last year. This will ensure that you claim the right deductions and prevent yourself from being audited.
Please note that this article is for informational purposes only. No liability is assumed with the information presented above.
Are you confused by what this means to you.
We trust our tax accountants and the media when we are told that interest on the home equity line is deductible for tax purposes. But in some cases this is just not correct.
Do you know when you take a cash out refinance from your home equity line of credit or decide to borrow money against your HELOC, the IRS limits the amount you can deduct for tax purposes, and in this case mortgage interest. In some cases if your home has devalued you won't be able to claim the deduction at all.
Well, the way this is set up, the IRS in general does allow you to deduct interest on your HELOC for tax purposes. They call this the home equity indebtedness deduction.
The home equity indebtedness means:
One of the deductions that the IRS gives you as a homeowner is to claim a mortgage interest deduction of up to $100,000 if you file a joint return. If you file a single or separate return the deduction is limited to $50,000. To make sure that we are specific, I am referring to one aspect of the deduction only and that is when you refinance or borrow more from your mortgage.
Now that you understand the deduction here's how they take it away from you.
Let us look at the following example to see how this works.
Let us assume at the time when you first acquired your home you paid $300,000. But now you only owe a balance of $260,000.
Now assume at this point in time you decide to borrow against your home and take out an additional $30,000 from your HELOC. The key question is, are you allowed to deduct the interest paid on the $30,000 as a mortgage interest tax deduction? Let's make one more assumption that your home is valued at $320,000 the day you decide to borrow money from your HELOC.
You may be in for a surprise. If you previously claimed a deduction or thought of claiming a deduction this year, the IRS may limit your interest deduction lowering your refund.
The best way to figure out what you can deduct is to do a simple calculation. According to the IRS you need to take the value of your home ($320,000) and from this you deduct the cost of your home ($300,000). The difference of ($20,000) is what you are able to claim as an interest deduction. You thought you may claim the entire $30,000 but as you can see the IRS limits this.
Now if the market value of your home has decreased below the cost of your home, you cannot claim interest on any of the $30,000 you borrowed. I have seen hundreds of clients caught up in this potential tax trap and most of them have their taxes completed by their tax accountants. So if you home is worth $290,000 today and the original cost is $300,000, the entire interest you paid on the $30,000 you borrowed cannot be claimed for tax purposes.
How do you know if you are caught up in this tax trap?
Go to the url or the unique links below and gain access to a quick and easy checklist. In this document, we have given you suitable points to consider preventing you from making unnecessary mistakes when filling in your tax return.
I strongly recommend that you contact your tax accountant immediately if you have used your HELOC funds for personal use in the last year. This will ensure that you claim the right deductions and prevent yourself from being audited.
Please note that this article is for informational purposes only. No liability is assumed with the information presented above.
About the Author:
If you have refinanced and used the proceeds for personal and looking for free tax software I encourage you to download the free home improvement tax deductions checklist first for the above topic.
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