Four Things You Need To Know About The Tax Deductions On Your Home Equity Loan

[Jan 5, 2009.]

 

One of the benefits of owning a home is that you can save money on your taxes by claiming deductions on the interest you pay on your mortgage. With a second mortgage or home equity loan, you can still take advantage of these tax breaks but the process can be a bit more confusing. Although there are also complex tax laws to keep in mind, here are four things to help you understand the basics of claiming tax deductions on your home equity loan. 

1. Evaluate Your Standard Deductions to Itemized Deductions
First of all, you want to figure out of if claiming the tax deductions on your home equity loan is even worth it. For most individuals, this first step means comparing your possible itemized deductions to the standard deduction limit. The goal of any tax deduction is to save you money; if your standard deductions are higher than your itemized deductions, you'll actually save more money by not claiming the interest on your home equity loan. 

2. Crunch the Numbers on Your Home Equity Loan
For home equity loans and traditional mortgages, only the interest on a first or second home is eligible for tax deductions. As price declines affect homeowners around the nation, you'll also want to keep an eye on your home's value. If your home equity loan surpasses the value of your home's fair market value, you can only deduct the mortgage interest up to the fair market value. 

3. Consider the Purpose of Your Home Equity Loan
Depending on the exact purpose of your home equity loan, home equity loans are tax deductible to a certain extent. If you used your home equity loan to consolidate debt, fund a business investment, or pay off another loan, you can only deduct interest up to the first $100,000 of the loan. If the home equity loan was used for home improvements or as a down payment for your second home, you can deduct the interest up to the value of your home--up to a maximum value of $1 million.

4. Consult a Qualified Tax Advisor
With all the numbers and rules to keep track of, things could get confusing pretty quick. In addition, these tax rules and regulations change constantly. For the most accurate information, the best point of reference would be a qualified tax advisor. The savings on these tax deductions could save you thousands, so the cost of a tax advisor makes sense in this situation. As an added benefit, with a tax advisor by your side, you won't have to worry about any problems or mistakes when it comes to deducting the interest on your home equity loan.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.