However, you're not going to get to deduct all that interest. Instead, your deduction is limited to interest on just $15,000 of the loan; that's the amount your home's value exceeds your first mortgage. Interest payments on the other $27,500 are not deductible, even though the equity line is secured by your home. So don't automatically assume you can deduct all interest on home equity debts.
What if your real estate circumstances are a bit brighter? Say, for instance, you're able to swing a vacation home on the lake. You're in tax luck. Mortgage interest on second homes is fully deductible. In fact, your additional property doesn't have to strictly be a house. It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities. You can even rent out your second property for part of the year and still take full advantage of the mortgage interest deduction as long as you also spend some time there.
But be careful. If you don't vacation more than 14 days at your second property, or more than 10 percent of the number of days that you do rent it out (whichever is longer), the IRS could consider the place a residential rental property and axe your interest deduction.
Did you pay points to get a better rate on any of your various home loans? They offer a tax break, too. The only issue is exactly when you get to claim it.
The IRS lets you deduct points in the year you paid them if, among other things, the loan is to purchase or build your main home, payment of points is an established business practice in your area and the points were within the usual range. Make sure your loan meets all the qualification requirements so that you can deduct points all at once.
A homeowner who pays points on a refinanced loan also is eligible for this tax break, but in most cases the points must be deducted over the life of the loan. So if you paid $2,000 in points to refinance your mortgage for 30 years, you can deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year on the new loan.
But if the refinancing frees up cash you then use to improve your house, you can fully deduct points on that money in the year you paid the points. The same rule applies to home equity loans or lines of credit. When the loan money is used for work on the house securing the loan, the points are deductible in the year the loan is taken out. If you use the extra cash for something else, such as buying a car, you still can deduct the points but not completely on one tax return. The points deductions must be parceled out over the equity loan's term.
Remember: It's only the portion of the points related to refi money you used for home improvement that is eligible for immediate tax-deduction purposes. The points attributable to the refinanced existing mortgage balance still must be amortized over the life of the refinanced loan.