When Is Home Equity Loan Interest Tax Deductible?

By Gina Pogol
Mortgage Credit Problems Columnist

Unfortunately, the tax deductibility of home equity mortgage interest isn't a no-brainer. But here is a handy guide that you can use to determine if you are able to take advantage of one of the best benefits of home equity financing.

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1. Do You File a Short Form? Mortgage interest is deducted on IRS Schedule A, Itemized Deductions. If you take the standard deduction and file a short form, the home equity mortgage interest tax deduction won't benefit you. This is where a good tax pro can help--have him or her run your numbers and see if you would pay fewer taxes by filing a long form and taking all of the deductions you are entitled to, like your mortgage interest, mortgage insurance, and other things like job-related fees or moving expenses. You might find that you can deduct that interest and save money after all.

2. Is Your Home Equity Loan More than $100,000? The IRS allows you to deduct interest on home equity loans totaling $100,000 or less. Interest on amounts that exceed $100,000 is not deductible. This limit applies to the total of all home equity loans on your primary residence and a second home if you have one. In addition, any loans you take that exceed your home's value are considered unsecured and the interest on amounts beyond your property's value is not deductible. These loans are rarely made except as part of loan modification efforts, because few lenders willingly put themselves in the position of lending on upside-down property.

3. What Is the Purpose of the Home Equity Loan? The IRS treats your home equity loan differently depending on how you use the proceeds. For example, money used for home improvement is considered home acquisition debt and fully-deductible up to the cost of your home plus the cost of your improvements. Debt that goes beyond that is treated as home equity debt. If you use the proceeds for investments or in a business, the interest may be deductible on other schedules as business or investment expense--even if it exceeds $100,000 or the total loans exceed your property's value.

The interest rates on bad credit home equity loans can be pretty high. Deducting that interest on your tax return can make paying it a bit less painful. To find your best home equity loan or other bad credit mortgage, fill out the quick and easy form on this site and let reputable lenders make you their best offers.


http://www.irs.gov/ / http://www.taxfoundation.org

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