Are Home Equity Loans Tax Deductible
As defined by the Internal Revenue Service (IRS), the interest paid on a home equity loan is typically tax deductible as long as the money is used to build a home, purchase a home or improve your existing home.
It also depends on the amount borrowed and the use of funds and whether you should itemize on your tax return or take a standard deduction. According to the 2017 Tax Cuts and Jobs Act, if you take out a home equity loan as a joint filer past December 15, 2017, you will be able to deduct interest on a maximum of $750K. If you do so as a single filer, the maximum interest deduction is an amount of $375K.
What Is a Home Equity Loan?
Home Equity Loans are a type of mortgage loan similar to a home equity line of credit such as HELOC, which allows the borrower to re-borrow the principal amount repaid and add a line of credit to the loan. It usually consists of a line of credit and a home loan all rolled into one. Home equity mortgages can be used as tax-deductible mortgage interest.
2017 Tax Cuts And Job Acts
After the 2017 Tax Cuts and Job Act was passed, homeowners using equity to acquire loans could not deduct interest on the amount used to consolidate or pay off debt or use for emergency expenses. This includes outstanding mortgage loans.
For instance, if your mortgage balance is $600K, you can only claim tax deductions on $300K of home equity loan.
However, if you acquired the home equity loan before the December 15, 2017 Tax Cuts and Job Act was passed, your limits would be higher.
As a joint filer, the maximum limit is $1 million and for a single tax filer using the money to build, buy or do home improvements, the limit would be $500K.
The Simple Explanation
If your recent home equity loan is $200K and you used $100K to consolidate your credit card debts and the remaining $100K went towards new home office construction, the interest you pay on the $100K for home office construction would be tax deductible. However, the interest paid on the $100K to consolidate credit card debt would not be tax deductible.
The Strong Points
In the home equity loan, funds are available for the borrower to use with each principal payment and can be re-borrowed automatically but usually at a higher interest rate. In this mortgage, the net debt of the borrower remains the same. Home equity loans are more attractive to borrowers than to investors.
Strong points:
- In a home equity loan, borrowers' credit increases as they pay off their mortgage.
- Home equity loans can be used for a tax deduction
- The lines of credit and home loans are grouped together
Get Your Tax Basics At the Taxry Store.
Income From Rental Properties
Interest accrued on a mortgage used to purchase property is deductible if you generate rental income from that property. Even if it is your place of residence, a portion of the interest is deductible if you rent part of it.
If you sell this property and use the proceeds to repay a loan, you no longer have to deduct interest, but if you sell the property at a loss and cannot repay your loan, the remaining interest remains deductible even if you do not no longer own the property.
Investment Income
If the reason why you borrowed the money in the first place is to invest, then the interest on your home equity loan might be tax deductible.
Once the investment is generating consistent income such as interests and dividends, or your expectation is that they will subsequently generate income, you may be able to deduct acquired interest on the loan from the total generated income.You should be aware that capital gains is not considered income for this tax deduction.
For example, if you borrowed the money to invest in the stock market and those stocks do not pay you dividends, but depend on the capital gains from the stock to earn income, then the interest is not tax deductible.
Earning an Income From Business
You may need money for the purpose of upgrading your existing business, such as:
Buying equipment
Financing an expansion
Supporting daily operations
In this case, you should consider a home equity loan. Be sure to deduct the interest you pay on the money from the business income earned. If your business suffers a loss of income, you can also deduct taxes.
Any interest that the company pays to finance its operations is generally deductible.
Borrow To Earn
If you pay interest on the money that you borrow and it earns income from investment and that income subsequently earns dividends and interest, you can deduct it on your tax return.
You cannot, however, deduct the interest you pay on the home equity loan unless the interest is paid on an income property. You can only deduct the taxes from that portion of the business.
Maintaining Your Finances
The most important thing to consider to keep abreast of your finances is to maintain good bookkeeping records to know the amount of interest you should deduct from earned income. Be sure to secure your receipts so you can determine which business activity should be tax deductible.
The Bottom Line
To summarize it all, if you use the home equity loan to purchase a home, construct a new home or carry out improvements to your existing home, it is tax deductible. However, if you combine the interest on the first mortgage loan and the home equity loan, in addition to other itemized state and local tax deductions and it is lower than the standard deduction for that year, it is recommended that you take the higher deduction option instead. It is also important to consult with a tax professional to know your options.
Conclusion
Depending on your income level and risk tolerance, a home equity loan can be a great way to borrow, but people who borrow should have good financial discipline and avoid using the funds to depreciate assets or personal expenses. Home equity loans also feature reasonable interest rates with interest-only and principal payment options or a combination of both. If you would like to learn more on this topic, it is best to visit the Goalry platform and financial stores where you will be better equipped to know where to start.
The Goalry Mall. Where Goals Happen.