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Home Equity Loans
Equity Loan Info:
-Building Equity
-Equity
Loan/Line Types
-Approval
Criteria
-Equity
Loan or Line?
-HELOCs for Emergencies
-Home Improvement Loans
-Loans vs. Line of Credit
-Costs
of HELOC
-Downside of Equity Loans
-Calculating Equity
-Eligible
Tax Breaks
-Why
Use Equity?
Refinancing
Home Purchases
Mortgages
Auto Loans
Personal Loans
Debt Consolidation
Credit Reports
Credit Cards
Home
-Taxes
-Managing Money
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-Checking Accounts
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EQUITY LOANS AND TAXES
Are you aware that your home is not just a form of shelter for
you and your family, but can also serve as your own private bank?
Get more info on why you should
borrow against your home's equity.
You can receive a generous tax break when you structure the money
you draw from your home. In fact, homeowners can typically deduct up
to $100,000 in interest paid for an equity loan or line of credit.
It is important to note that there are many deductibility limits. In
addition, it is possible for the alternative minimum tax to cancel
out the benefits. Before your decide to tap into the equity from
your home, it is important that you go over your total financial
needs and your tax situation and determine if an equity loan is your
best coarse of action.
A variety of different uses...
You can use the funds you receive from your equity loan for whatever
your needs are including
college tuition costs,
home improvements and remodeling projects or
consolidating unsecured debts.
...one large tax break
When discussing taxation and home equity, you typically examine the
deductibility of the interest. As mentioned, the tax laws permit a
borrower to subtract the interest on an equity loan up to $100,000,
no matter how the funds are utilized.
However, it is important to note that whether or not
the interest can be deducted, and how much, will depend on several
variables. For example, a property's
fair market value and any existing mortgage can affect the tax
break a homeowner is entitled to.
When the total of all loans secured by a home, including all equity
loans and the first mortgage, exceed the fair market value of the
property's, the interest on the amount of debt that surpasses the
home's value is not deductible.
For example, you have a $85,000 mortgage on your home, which is now
worth $105,000. Your bank says you qualify for a
125 percent loan-to-value equity loan of $46,250
($105,000 x 125 percent = $131,250 minus $85,000 left on your first
mortgage = $46,250). You look to utilize this loan to pay for your
son's school and to
buy him his first car. You intend on taking advantage of the
interest tax deduction since your loan use is easily below the
$100,000.
Wait! Now is when the worth of your home comes into the picture.
Under these circumstances, tax rules say that you can deduct
interest on equity loans up to $100,000, or, when the total sum of
all loans secured by a home is greater than its fair market value,
on the equity amount that does not exceed the property's value,
whichever is less. In this case, that's $20,000 ($105,000 minus
$85,000).
Therefore, the total eligible tax deduction based on the example
above would be $20,000. You are not able to deduct the interest on
the $26,250 equity loan balance.
Home improvements = improved tax breaks
You are entitled to different tax breaks when you utilize your
home equity loan for making improvement to your residency. In this
instance, the equity funds are basically treated as first mortgages,
otherwise known as acquisition indebtedness. As a result, you can
deduct up to $1 million in mortgage debt.
For example, suppose you took out a $150,000 home equity loan to add
an extension to your $600,000 home. You can deduct 100% of the
interest paid on the loan. On the contrary, if you use the $150,000
for a lavish 'around-the-world' vacation, you would only be able to
deduct the first $100,000 in interest paid.
You are never going to be required to document how
you choose to spend the funds you receive from your equity loan.
However, it is important that you keep
comprehensive tax records in the even that you are audited by
the IRS.
Additional equity loan considerations
Home equity borrowers need to be aware of alternative minimum tax
(AMT) implications. It is possible that this parallel tax system can
result in taxpayers losing deductions.
Under the AMT, the interest on acquisition-debt loans is still
deductible. However, money secured by your home but utilized for
nonresidential intents is not allowed.
Equity loan borrowers can also be affected by the tax gap -- money
the IRS says it is owed, but which taxpayers have not paid. It is
believed by tax officials that illegally claimed home-related tax
deductions are a direct cause to this collection deficit.
If you are caught by the IRS for making incorrect claims on equity
loan interest, you will have to pay it back, along with penalty fees
and interest charges. Examine the section on
understanding taxes
In conclusion...
Even though a
home equity loan may appear as a small loan, you are still
securing it with your residency. Therefore, if you fail to make
payments, the bank will foreclose on your home. If you can't make
your loan payments, there are steps you can take to
avoid foreclosure.
Related Reading:
Owning a Home Means Tax Benefits
Homeowner Tax
Myths
Home Equity Loans vs. Cash Out Refinancing
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