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Tax Talk with George SaenzHome equity loan deductions and tax consequences of a co-op apartment sale.

Limits on home equity loan deductions

Dear Tax Talk:
I am confused about the limit on deductions for home equity loans.

If I have no mortgage and my home is valued at $500,000, can I only deduct interest on the first $100,000 of an equity loan, or is the interest deductible up to the home's full value of $500,000?


Dear Bruce:
You're only confused because the law is confusing. Interest on home mortgages (either a first or second home) is deductible when the mortgage falls within certain loan limits and is incurred either:

  1. For the purchase or improvement of the home (home acquisition debt), or
  2. Refinancing of an existing mortgage on the home (refinanced home acquisition debt), or
  3. An equity borrowing regardless of the purpose (home equity debt).
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The total amount that you can treat as home acquisition debt on a first and second home is $1 million ($500,000 if married filing separately). That is the loan amount, not interest paid. If you do not take out a mortgage to buy the home but do so within 90 days of buying the home, you can treat that debt as home acquisition debt up to the cost of the home plus improvements. Similar rules apply if you build the home and include the costs within 24 months before the date of the mortgage.

You can refinance existing home acquisition debt up to the principal balance of the existing debt plus the cost of improvements made within 24 months of the date of the debt. In most cases, the date that you apply for the mortgage will be considered the date of the mortgage and not the actual date it is recorded. The existing principal and improvements must fall within the $1 million limit.

If you exceed the $1 million, the interest on that portion of the debt over $1 million is not deductible as home acquisition debt, but it may be deductible as home equity debt up to the limits in that category.

Home equity debt is debt incurred for reasons other than to buy, build or improve your home and can include home acquisition debt in excess of the $1 million. Total home equity debt on your main home and second home is limited to the smaller of:

  1. $100,000 ($50,000 if married filing separately), or
  2. The total of each home's market value reduced by the home acquisition debt.

If your home mortgage debts are over $1.1 million or you have debt incurred prior to Oct. 13, 1987 (the date the law got real confusing), you should review Internal Revenue Service Publication 936, Home Mortgage Interest Deduction.

In your case Bruce, if you did not recently buy the $500,000 home, you will only be able to claim interest deductions on up to $100,000 in home equity debt.

Co-op sale tax consequences

Dear Tax Talk:
I am presently thinking of selling my co-op in New York City and moving to San Diego.

If I purchased my co-op for $125,000, sold it for $360,000 and bought a new home in San Diego for $250,000, what are my tax burdens?

How do these get calculated?


Dear Mike:
A cooperative differs from home or condominium ownership in that a co-op owner owns stock in a corporation that entitles the owner to occupy an apartment in the building. For most purposes of the tax law, a co-op owner is treated the same as a home or condominium owner and is entitled to the same deductions as a homeowner and, if otherwise eligible, qualifies for the gain exclusion upon the sale of the property.

Upon the sale of the property you are eligible to exclude $250,000 in gain if you have owned the stock and lived in the apartment as your main home for at least two years. If the move is job or health related and you don't meet the two-year rule, you are eligible for a partial exclusion. For more information, see my column on home sale proceeds and Internal Revenue Service Publication 523, Selling Your Home.

Since New York tax laws are quite comprehensive, you may want to discuss the state and city rules with their respective taxation departments.


-- Posted Sept. 19, 2000

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