Topic: TAXES; HOME EQUITY
Who is affected: HOMEOWNERSHIP
DEGREE OF DIFFICULTY: EASY
What you'll need: 1040 TAX FORM AND SCHEDULE A, STATEMENT OF HOME EQUITY INTEREST FROM LENDER
What you need to know
If you've taken out a home equity loan or line of credit, don't forget you can also deduct the loan or HELOC interest from your tax return.To do so, you'll need to use the IRS 1040's Schedule A for itemized deductions.
How do you know if your loan is eligible for deduction? Generally, equity debts of $100,000 or less are entirely deductible. But if your outstanding mortgage combined with your equity loan exceeds your home's value, the IRS will rein in the amount of deductible debt interest.
An example:
Your mortgage balance: $125,000
Your home's value: $140,000
Your loan-to-value equity line: 125 percent, or $50,000
($140,000 x 125 percent = $175,000 – $125,000 = $50,000)
Your deduction allowance: interest on $15,000 of the loan
Why? Because $140,000 (home value) – $125,000 (mortgage loan) = $15,000
Nondeductible debt: $50,000 – $15,000 = $35,000
For more information, check out the Bankrate feature "Taxes and your home equity loan."
Step-by-step
Figure out exactly how much you'll save with our tax deductible loan calculator.
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- Adding homeownership to your taxes
- Tax facts: your home equity loan
- Brand new tax breaks for homeowners
- Taxes and your HELOC
- Home equity loans: the good and the bad
- Homeownership tax myths: 5 tall tales
- A tax guide for first-time homebuyers
Interest on equity debts of less than $100,000 usually is tax-deductible.
If you take out more than $100,000 but use it on home improvements, 100 percent of the debt interest should be tax-deductible.