Home Equity Loans and the I.R.S.

[Jun 18, 2009.]

 

Can You Deduct The Interest You Pay?

A mortgage lender is NOT an accountant.  You always need to check with a tax professional about your unique personal tax situation.  If you don't have an accountant, or want to read for yourself what the I.R.S. has to say on this topic, click here. 

Home Acquisition Debt

By definition, Home Acquisition Debt is a mortgage taken out after October 13, 1987 that was used to purchase, build or significantly improve real property.  It must be a qualified property (see below) and the debt must be secured against the home.   The mortgage interest in only deductible for the first million dollars borrowed.  Anything over one million in debt is not deductible.  More...

What Is A Qualified Property?

According to the I.R.S., a qualified home is, "your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities."

The I.R.S. has a lot to say about what does and does not qualify for the mortgage tax deduction.  Click here to read the appropriate publication. 

How Do Home Equity Loans Fit?

The first question to ask yourself is, "How did you use the money?"  If the Home Equity Loan you have was used to purchase the house, it should be considered Home Acquisition Debt.  If, however, you took the Home Equity Loan out after purchasing the house, the interest may or may not be entirely deductible.  Ask your accountant, or refer to the I.R.S. publication.

A Common Misuse

Supposed you bought your house ten years ago for $100,000.  During the boom period, your home value increased to $200,000.  You, like many people, took out a Home Equity Loan to consolidate credit card debts or make a major purchase.  BE CAREFUL about writing off all of that mortgage interest.  Generally speaking, using your home's equity to pay credit cards is not usually tax deductible.

Better Safe Than Sorry Later

No one wants to get caught years later owing money to the I.R.S.  Penalties and interest can be devastating! If you have any doubts at all about whether or not the interest you are paying on your Home Equity Loan is deductible, ask a professional or call your local I.R.S. office.

Written by Tiffin Anderson, CMPS with PrimeLending in Reno, NV

 

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.