Using home equity to buy CDs

Dear Tax Talk,
I purchased a home for $240,000 and paid some extra payments and brought down the mortgage amount to $160,000. If I take a home equity line of credit will I get any tax benefit? I have no use for this money, but am considering putting it in some short-term certificates of deposit if I get tax benefits. Does this make any sense? What is the maximum amount of loan or interest that I can take for the exclusive purpose of reinvesting in CDs? -- Ram

Dear Ram,
While you can certainly deduct interest on a second mortgage, it doesn't make any sense to borrow the money unless there is a rational need.

If you were to borrow the funds, you'd probably be paying more interest on the mortgage than you'd earn on the CDs. Since you'd pay tax on the CD interest, you wouldn't be getting ahead by claiming the mortgage interest deduction.

What you're missing is the fact that you already have a savings account in the form of home equity. Although you can't see it as you would in a bank statement, it's just as good as having the money in the bank if you had to borrow funds.

Most folks tap their home equity to consolidate debt or to purchase another property. These are legitimate needs and a good use of the home's equity. By borrowing for these purposes, you continue to enjoy your home without having to sell it and reduce debt that is probably at a higher interest rate or make an additional investment in property.

Generally, you can deduct interest on a second mortgage if you don't borrow more than $100,000. You may be able to deduct interest on more than $100,000, depending on how you use the funds. For example, if you borrow $125,000 to build a $25,000 pool and use the other $100,000 to buy another property, the interest on the full $125,000 would be deductible.