A few weeks ago, I did a post that covered some home equity loan basics. In that post, I listed one of the advantages of a home equity loan as “Payments are often tax-deductible.” That’s some really insightful information, huh?
How about some more detailed information, courtesy of Bankrate.com. Basically, interest paid on a home equity loan or home equity line of credit of up to $100,000 is tax-deductible. There are a couple exceptions, however.
“When the combination of all loans secured by a home, including the first mortgage and any other equity loans, are more than the property’s fair market value, the interest on the portion of debt that exceeds the home’s value is not deductible.”
So this stipulation only affects you if you have a loan-to-value (LTV) ratio of over 100%. For example, if your home is worth $100,000, you still owe $80,000 on your mortgage, and you have a home equity loan of $30,000, your LTV ratio will be 110% - ($80,000+$30,000)/$100,000. In that case, only interest paid on the first $20,000 of your home equity loan is tax deductible, since the other $10,000 is the portion of your loans that exceeds your home’s value.
One more exception - if you use your home equity loan for home improvements, you can deduct interest on up to $1 million in mortgage debt. In this case, it’s especially important to keep track of receipts so you can prove that your loan really was used to finance home improvements, and not just used to buy that diamond-encrusted cell phone you’ve always wanted.
