Tax Deduction On A Line Of Credit

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I have heard rumors that if you open a Home Equity Line of Credit that is over $100,000... that it is not tax deductable. Is this true? I have about 120,000 in equity that I would like to exercise for properties and I am trying to weigh my options.

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  • DaveT14th February, 2004

    From IRS Publication 936

    Home Equity Debt
    If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit, may qualify as home equity debt.

    Home equity debt is a mortgage you took out after October 13, 1987, that: 1. Does not qualify as home acquisition debt or as grandfathered debt, and

    2. Is secured by your qualified home.Example.

    You bought your home for cash 10 years ago. You did not have a mortgage on your home until last year, when you took out a $20,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. This loan is home equity debt.

    Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or

    The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. Example.

    You own one home that you bought in 1998. Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) - $95,000] with Bank M.

    Your home equity debt is limited to $15,000. This is the smaller of: $100,000, the maximum limit, or

    $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000.Debt higher than limit. Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 - $15,000] in the preceding example) generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest.

  • smallinvestments15th February, 2004

    Wow, thanks DaveT that helps a lot. You're the best

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