Pass on the Tax
One of the greatest benefits of opening a home equity line
of credit or home equity loan is the advantage of tax deductions.
With Countrywide, usually customers can take deductions from
their taxes if they use home equity for home improvement,
debt consolidation, for financing college and/or for making
a purchase of assets for personal use.
Experts say that home equity credit used for home improvement
is the best way to go and will almost always give you significant
tax deductions. This is called acquisition indebtedness, and
is used for projects such as building a house or making extreme
improvements or renovations on your home.
They are seen in a similar light as first mortgages, and
give greater leeway than home equity loans used for other
purposes. Home improvement purposes allow people to deduct
up to $1 million worth of their debt on first mortgages, while
for other equity loans you can only deduct interest up to
$100,000.
Be aware of the regulations, restrictions and exceptions
to these tax deductions. If your home equity loan combined
with your first mortgage raises your debt beyond the value
of your home, you may not be able to take off taxes. If you
have other options for money, you should probably take those
options before home equity. It may be convenient but it does
cost you, and it can become precarious when you don’t
have the funds to pay it back. No one wants to incur additional
debt.
Home equity is deducted from your gross income. You simply
subtract the home equity loan amount from your gross income
on the tax form.
To find out if you can receive tax benefits from your home
equity loan or credit, find your schedule A on an IRS form
and add up your eligible deductions, including home equity
interest, mortgage, donations and medical expenses.
Next, calculate how much interest you have paid to your mortgage
or equity lender and note that on the “interest you
paid” line. Last, add up all your itemized deductions.
If your deductions amount to more than the standard tax deductions
for that year, you will have a sizable tax advantage.
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