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Deduction limits on HELOC interest


Dear Tax Talk,
About six years ago, I bought my condo for $99,000. It's now worth $300,000. Six months ago, I took out $100,000 on a cash-out refi. My balance is $185,000. I am thinking about getting a home equity line of credit to purchase a new car so I can get the home interest deduction, if possible. Will my HELOC be tax deductible? Thanks. -- Audrey

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Dear Audrey,
Home mortgage interest is deductible as an itemized deduction depending on various thresholds and whether it is to purchase or cash out on a refinance.

First home mortgage debt incurred to purchase a primary and second residence is deductible, provided the total acquisition debt is less than $1 million. In your case, you borrowed $99,000 or less. You would still have the ability to borrow and deduct the interest on another $901,000 in debt if you acquire a second residence.

When you refinance acquisition debt or take out additional debt such as a HELOC, you can deduct the interest on such debt if you use it to improve your residence and on up to an additional $100,000 that you can use for any purpose, except for the purchase of tax-exempt securities such as municipal bonds. If you use the $100,000 to buy a second home, then it gets thrown back into the $1 million pot.

In your case, you already borrowed $100,000 but did not state what it was for. If you used the $100,000 to purchase investments, you can claim the interest on the mortgage as either home mortgage interest or investment interest.

If you use it to take an around-the-world trip, then you can claim it only as mortgage interest.

Interest on borrowings in excess of the $100,000 would not be deductible unless it's for business or investment purposes, which would not be the case if you borrowed to purchase a new auto, unless some of the prior $100,000 was for improvements or investments.

For example if you used $20,000 of the prior $100,000 to make improvements to the condo, then you could borrow up to an additional $20,000 to purchase the car and claim the interest as mortgage interest.


-- Posted: May 20, 2004




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