When is interest on a home equity loan tax deductable?

Question

I am looking at HELs and they say that the interest paid is sometimes deductable. When is it and when is it not? Where's a good place to get the lowest rate?

Answer 1

Home Equity interest is almost always deductible.

Exception 1) Only the interest on the 1st $100,000 in home equity loan interest is deductible. 99% of HELs are under this amount.

Exception 2) HEL interest is not deductible for AMT purposes if the HEL is not used to buy or improve the home. Most taxpayers do not get hit by AMT.

I rarely (if ever) run across either of the above 2 exceptions.

Answer 2

You have to itemize for Home Interest to be deductible. Most people borrow enough money for the home purchase that itemizing makes sense.

Also, other than the 1st and maybe 2nd mortgage you have which are fully deductible, if you have a Home Equity Loan (Line of Credit) the amount that exceeds 100K is not deductible.

Another condition that may make the interest non deductible for you is if multiple people are on the loan and another person is making the claim. This can happen if you're married filing separately. Most likely, the deduction will be applied to the spouse bringing home the larger income.

Alternative Minimum Tax sometimes comes into play too. In this case, you'll claim the deduction for interest still; but your circumstances may trigger you to pay the AMT instead. So, you might not benefit from the interest deduction.

Most of these exceptions are rare. If they don't apply to you, then you'll almost definitely get the full benefit of the deduction.

Answer 3

I assume your mortgage debt was incurred after 1987, and that your filing status is not married filing separately. Your debt has to be for your main home or a second home.

I would add to the other answers:

If you use your home equity loan to improve your home, it is in fact "acquisition debt" and is deductible as long as your total debt on the home is less than $1 million.

If you do not use your home equity loan to improve your home, you are limited to an interest deduction for up to $100,000 of debt as long as this amount is not more than the difference between the fair market value of your home minus other debt on the home.

Answer 4

That is a tricky question.