home equity

How do I: Claim a tax deduction for home equity interest

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
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