|Home Equity Loan have been very popular because of lower interest rate than most of unsecured debt. You can consolidate your loans into a home equity loan and can easily save money by filing lower returns. If you want to lower your annual tax payments , then this may prove you a good option.
Homeowners can get their interest amount deducted while filing their tax returns. However interest deduction is limited. For the first $100,000 of a home equity loan, the interest is deducted . The amount is $50,000, if married and filing separately.
Homeowners take out home equity loan for various purposes:-
- Debt consolidation
- Home improvement
- Business investments
- Large one time expense
- Miscellaneous expenditures like tuition fees, car purchase, traveling. etc.
If you are in need of money, you can take out a home equity loan of up to $100,000 and deduct the interest payments. Interest can also be deducted on two homes up to a total of $1 million in mortgage debt. There has been a lot of hue and cry about whether interest on a second home is tax deductible or not. Interest on a second home is tax deductible but with certain limitation. The interest can be deducted on equity loan worth $100,000, along with the $1 million for a total of deductions on the interest paid on $1.1 million. However home equity loan tax deductibility depends on various factors.
As approved by the IRS on its website, if the funds were used for home improvement or repurchase, then mortgage interest you pay will be tax deductible. According to IRS any improvement that "adds to the value of your home, prolongs your home's useful life, or adapts your home to new uses." are approved. You can also use it for business investment purposes . For any other uses, some restrictions and limitations apply. There are tax restriction if the loan amount rises above the value of the property. In such situation borrowers can deduct the interest on only part of home equity loan. Only the interest that is paid on the difference between your home's current value and the amount you owe on your first mortgage is deducted.
Always take out home equity loan after ensuring the pros and cons of the available tax benefits as well as the risks and limitations. It is better advised to not go for home equity loan which exceeds the current value of your property. This is because, in case of inability to make the payments, there is always a risk of repossession of your home. Always consult a tax consultant before taking out such type of loan. For further understanding and details you can always browse the IRS Website irs.gov and read about the content on Home Mortgage Interest