12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Mortgage Interest Deductions: Home Equity Loans
By Kelly WingardNFNS Columnist
In 1987, Congress
expanded the list of itemized tax deductions to include interest on home equity
loans. A home equity loan allows you to tap into your home's unrealized
investment potential. In other words, home equity is the difference between
your home's fair market value--the price a willing buyer would pay you for it--and
the amount you owe on your mortgage(s). For example, if your home would sell
for $100,000 and you owe $70,000 on your mortgage, your home equity equals
$30,000.
There are two types of home equity loans: second mortgages
and home equity lines of credit. With a second mortgage, you borrow a lump sum
up-front against your home's value. With a home equity line of credit, you
receive a checkbook or credit card with a pre-established limit and borrow
against that limit at your own discretion. Both types of home equity loans are mortgages
that must be secured by your qualified home to be deductible.
Home Equity Debt from an IRS Perspective
The IRS separates
mortgage interest into home acquisition debt and home equity debt. Home
acquisition debt is debt incurred to buy, build, or substantially improve your
main home or qualified second home. Home equity debt is debt that is secured by
your home that does not qualify as home acquisition debt. The proceeds of home
equity loans can be used to pay for college, vacations, medical expenses,
vehicles, etc.
Interest on
qualified home acquisition debt can be deducted in full if you itemize your
return. However, the deduction for home equity debt is limited to the smaller
of:
- $100,000
($50,000 if married filing separately), or
- The total
of your home's fair market value less the amount of your home acquisition debt.
In our example, the deduction would be limited to $30,000, even if you borrow
more. However, typical of the IRS, there are some exceptions to this rule.
For more information
regarding the deductibility of home equity loan interest, consult your tax
professional or IRS Publication 936, Home Mortgage Interest Deduction.
Sources:
IRS:
Pub 936
About the Author
Kelly Wingard is a
freelance writer and a 25-year veteran tax preparer. She is a regular
contributor to the
About the Author
Kelly Wingard is a freelance writer and a 25-year veteran tax preparer. She contributes regularly to the University of Illinois Tax School training manual for tax professionals.