Dear Tax Talk,
Is money withdrawn from a HELOC considered as income and therefore taxable?
Money withdrawn from a home equity line of credit, or HELOC, is not considered income to you and is not taxable. However, if the debt is not repaid as required, then it may be taxable to you if the debt is canceled or forgiven by the bank.
A HELOC is a type of mortgage taken on your home whereby the lending institution lets you borrow up to a certain limit against the equity you have in your home. You take out money from the line of credit as you need the money and you can use the proceeds for whatever you want –from home improvements to education expenses. The interest rate is variable and is usually tied to an index, such as the prime rate. Additionally, the interest may be tax deductible as an itemized deduction on Schedule A, subject to limitations.
Many people took out HELOCs and then ran into trouble when they were trying to sell their homes after their homes had decreased in value. So, keep in mind that if you sell your home, the loan must be repaid at that time. If the HELOC is not repaid and written off by the bank, then you will be issued IRS Form 1099-C, Cancellation of Debt. The income will then be taxable to you unless you meet the requirements for excluding this from your income using Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.
Thanks for the great question and all the best to you.
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