Are home equity loans tax deductible?

Question

My house is paid for, no mortgage, and I'm looking to buy a car via a nome equity loan. Is this tax deductible?

Answer 1

Yes, to an extent. Here's the info.

Making a move
Thanks to changes in the tax laws dating back to 1986, many people can benefit by moving debt with non-deductible interest -- such as auto and motorcycle loans and credit cards -- over to a tax-deductible loan or line of credit secured by a home. The tax advantage has the effect of lowering the already low equity loan rate even further, making credit cards look like a pretty silly way to manage debt.

"For home equity, you can deduct the interest on a loan up to $100,000 regardless of where you use the money," says Thomas Langdon, a certified financial planner and tax professor at The American College in Bryn Mawr, Pa. "Let's say your children are going to college and you need extra cash. You can take a home equity loan of up to $100,000 and deduct the interest payments on the Schedule A."

The limit applies regardless of whether a borrower has one $100,000 equity loan against a primary residence, or a combination of loans worth that much but secured against two different homes.

Tax restrictions
Tighter tax restrictions apply to borrowers who take out home equity loans that, along with a first mortgage, raise the debt to a level above the value of the property.

In such circumstances, borrowers can deduct the interest on only part of home equity debt. The Internal Revenue Service determines the eligible debt by subtracting the amount borrowed to acquire the property -- the first mortgage -- from the fair market value of the home.

A homeowner with a $100,000 property and an $80,000 first mortgage, for example, might be able to get an equity loan for $45,000 under a 125 percent loan-to-value program. But the house is worth only $20,000 more than the original debt, so only the interest on the first $20,000 of the home equity debt is deductible, according to Ron Kotick, a tax specialist with tax preparer H&R Block Premium in West Palm Beach, Fla.

Improved circumstances
Langdon notes that equity loans used for home improvement qualify for different treatment, however. They resemble first mortgages for tax purposes. And since people can deduct interest on $1 million worth of first mortgage debt, they have greater leeway than those who use their equity loans for things besides a new deck or garage.

"It's called 'acquisition indebtedness' -- a loan you get to build your house, a loan to buy your house, or any loan you take out to substantially improve your home," says Roxanna Pletchan, a certified financial planner with Lassus Wherley & Associates in New Providence, N.J.

For instance, someone with a $400,000 first mortgage who added a bedroom wing for $200,000 could deduct all the interest paid. A similar borrower who used the $200,000 loan for college expenses, on the other hand, only could deduct the interest paid on the first $100,000 of the balance.

Answer 2

The loan itself is never deductible but the interest you pay is.

One caveat though. If you get bit by the AMT bug, as the loan is being used to buy a car, the interest would not be deductible for AMT purposes.

Answer 3

You should consulate a tax preparer, but usually they are. I used mine to buy a car. I just make sure to pay it off and not let it drag out any longer than a car loan.

Answer 4

Generally yes, as home mortgage interest, if you itemize.

Answer 5

Pretty good arguments.