Interest on Home Equity Lines Of Credit (HELOC) and other types of second mortgages and home equity loans is tax deductible. Like other types of mortgages, only the interest is deductible. The amount deductible depends on what you purchased with your loan/line of credit. Interest coming from the first $100k of the loan is always deductible; interest from any amount higher than $100k may be deducted if the loan was used to make home improvements. In that case interest may be deducted up until the loan amount was $1 million. Since most home equity lines are for less than $100k, this type of lending allows a borrower the flexibility to use their loan and still deduct the interest from their taxes.
Home equity credit lines became especially popular because they allow a borrower to finance ordinary purchases at interest rates far below those available on other lending products. For instance, a home owner could use a HELOC to purchase a new car, instead of getting a car loan. The resulting interest rate would likely be lower than what the same borrower could obtain on a regular car loan; and the interest would be tax deductible.
To deduct the taxes on HELOC interest, you will have to itemize your tax return, which most homeowners are already doing. Because you have to give up your standard deductions to itemize ($5,800 for single, and $11,600 for married filling jointly) a borrower should figure out in advance whether the interest deduction will lead to a larger total or whether they should remain with a standard deduction. However, if you are already planning to itemize your tax return, then adding HELOC interest will simply be another way to reduce your taxable income. Your lender will provide a 1098 that will show the amount of HELOC interest you paid during the year.
In general, a borrower should be cautioned against taking out a HELOC just because it offers tax deductions. At the end of the day, you will be incurring additional debt that will be secured by your home, so make sure that you really have a need for the extra money and you have the ability to comfortably repay your line of credit. Failure to do so will be putting ownership of your home at risk.
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