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Is A Home Equity Line Of Credit Tax Deductible?

Is A Home Equity Line Of Credit Tax Deductible?

Being a home owner comes with many benefits such as not having loud neighbors above you, enjoying a backyard barbecue and paying yourself by building equity in the place you live. An additional and often used benefit from owning a home is called a home equity line of credit which can help with consolidating debts or starting a small business. Since mortgage interest is tax-deductible, the interest expense resulting from a home equity line of credit also has a similar tax benefit. So the answer is... Yes, a home equity line of credit is tax-deductible.

What is a Home Equity Line of Credit?

After making mortgage payments for a number of years, many home owners will have built up substantial sums of equity. A home equity line of credit or home equity loan uses the property as collateral to secure a personal loan. The amount of the loan is based off a percentage of the total equity. For example, if a home owner has a $200,000 mortgage and they have equity of $60,000, they will normally be able to get a loan for 75% of $60,000 or more accurately $45,000. Most lenders will not use an appraised value due to fear of fraud and pricing fluctuations in the housing market. Some lenders will however use an appraisal to verify that the property is worth at least the mortgage amount and that the home owner is not underwater.

Tax Deduction Benefit

The interest expense resulting from a home equity line of credit or home equity loan is always tax-deductible but the amount will vary based off how the loan is used. If the HELOC is used to make home improvements such as remodeling or renovating then interest can be deducted up to $1 million per married couple or individual. If the home equity line of credit is used for something other like debt consolidation or to start a small business then the interest expense is only deductible up to $100,000. Many consumers never go above the base hundred thousand dollar limit but if this is a concern then consult with a certified public accountant or tax attorney prior to obtaining a HELOC.

How to Use the Deduction

In order to claim the interest expense from a home equity line of credit on your personal taxes you will need to use a Schedule A for your 1040 return. As with the end of your mortgage interest document you receive from your lender for your primary loan, you should also receive a similar document for your home equity line of credit. If you don't, you can ask your lender to provide a summary showing how much of your HELOC payments went towards interest and principle. Once you have the interest amount you can include this on your taxes as a deduction.

Word of Caution

Home equity lines of credit are heavily marketed by financial institutions such seeking to capitalize on consumer residential equity. The inherent risk with a HELOC is that, should a consumer default on the loan, they run the risk of having their personal property, namely their home, foreclosed upon and their family evicted. A home equity line of credit can be a great tool to get out of debt or increase the value of your home but it also has a significant underlying risk which should be fully understood prior to seeking this type of loan. Ask questions and read all documentation thoroughly before signing on the dotted line to protect yourself and your home.