New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
- advertisement -
Bankrate.com
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Equity
Auto CDs &
Investments
Retirement Checking &
Savings
Credit
Cards
Debt
Management
College
Finance
Taxes Personal
Finance

Home-equity interest deduction

Dear Tax Talk,
I can't get a grasp on the correct answer: If I borrow against the equity in my home and use it to build a rental home, can I deduct the interest expense on the amount over the $100,000 home-equity debt limit? If the answer is yes, where is the interest expense deduction to be put on my tax return?

Could you expand on the ramifications of such borrowing and subsequent use of the proceeds so far as the tax deduction of the interest goes?! I am so frustrated in trying to understand the right way to treat this interest expense!
-- Peggy

- advertisement -

Dear Peggy,
The general rule is: You can claim, as an itemized deduction, interest expense paid on a mortgage used to acquire your principal residence and a second home. You can also claim, as an itemized deduction, interest expense on an additional $100,000 in borrowings without having to justify the use of the borrowing. However, if you do use the additional borrowing for investments, or substantial improvements to your home or homes, you can increase the $100,000 limit but can also change the character of the interest expense and, therefore, where you claim the deduction.

You change the character by tracing the borrowing to the use of the funds. In your case, you want to use $100,000 or more to build a rental property. Hence the interest on this debt (even if it goes beyond $100,000) becomes deductible against the rental income.

Alternatively, you can claim the interest on $100,000 of the total debt as an itemized home-mortgage interest deduction and the remainder against the rental income. You might want to allocate some of the interest as an itemized deduction if the rental property does not generate sufficient income to utilize all of your deductions in the year.

Additionally you might want to claim the interest on the $100,000 as itemized during the construction period to avoid limitations on the deduction. However, you may want to open a separate bank account to simplify the tracing of the borrowing to the construction of the property.

Bankrate.com's corrections policy-- Posted: Nov. 11, 2005
Read more Tax Adviser columnsAsk a question
 RESOURCES
Homeownership tax breaks
Getting the most from itemized deductions
Tax breaks for non itemizers
 TOP TAX STORIES
No stories available


Home Equity
Compare today's rates
NATIONAL OVERNIGHT AVERAGES
$30K HELOC 4.32%
$50K HELOC 3.99%
$30K Home equity loan 5.00%
Rates may include points
RELATED CALCULATORS
  Calculate your payment on any loan  
  How much house can you afford?  
  Can you borrow from your home equity?  
VIEW ALL  
- advertisement -
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here.

Bankrate.com ®, Copyright © 2014 Bankrate, Inc., All Rights Reserved, Terms of Use.