As is the case with your regular mortgage, the interest from a home equity loan is tax deductible, but the principal is not.The exact amount you can deduct depends on what you use the loan for: If it is used to make home improvements, then you can deduct interest from the first $1 million dollars of debt.If you use the loan for other purposes, like college tuition or buying a new car, then only the interest on the first $100k of debt is deductible.Since most home equity loans are for less than $100k, many borrowers will be able to deduct all of their interest payments.
It is also important to note that the IRS only allows you to deduct interest on mortgage loan amounts up to the value of your home. To figure out how much home equity loan interest can be deducted, subtract the amount of your mortgage from the value of your home.That number shows how much you can deduct from second or other types of mortgages.For instance, if you have a home that is worth $120k, a mortgage for $100k, and an equity loan for $40k, you will only be able to deduct interest from the first $20k of the equity loan.This restriction has become more important after the Great Recession, as many borrowers have homes worth less than their mortgage, meaning they will likely be unable to make a tax deduction for their home equity loan interest.
Finally, you will have to itemize your taxes in order to claim the interest from your home equity loan, just like with your mortgage interest deduction.In other words, you will have to give up your standard deductions, currently $5,800 for single folks and $11,600 for married couples filing jointly. You should therefore make sure that your total itemized deductions will be worth more than those amounts, otherwise you won’t be saving any money by itemizing.At the end of the tax year, your lender will send you a form 1098 stating how much interest has been paid on your loan during the year.
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