Is a Home Equity Line Of Credit Tax Deductible?

Is a Home Equity Line Of Credit Tax Deductible?
By Jimmy Sturo

Many people invest in real estate by making a full upfront payment, but are not financially sound enough to renovate or refurbish it. These people can avail of a personal loan against their property with a home equity line of credit or HELOC. A HELOC offers a higher loan amount than other similar loans based on the credit limit of the borrower.

A HELOC allows a borrower to explore the extent of credit obtainable from lenders. Repayments have to be made every month, along with the interest that could be tax- deductible. There are limitations on the deductions on the personal tax returns for the interest paid on HELOC.

Only that part of the interest on debt can be deducted, which cannot exceed the value of the collateral on a home and has to be less than $100,000.

If the borrower makes the real estate investment as a corporate entity, then deductions in the form of the business interest expenses can be expensed. This transaction needs to be reflected on personal returns.

It must be documented in writing and should be within the limits of normal business transactions. Customers need to consult their tax consultants and advisors on the legality involved in order to save on tax.

Financial consultants will give advice on planned tax-breaks regarding HELOC. The interest deduction is not a dollar-for-dollar reduction of the taxes. It is only a percentage. The deductions may not be as valuable due to the declining tax rates.

If the adjusted overall income is high enough, the phase-out for itemized deductions may prevent the borrower from taking a full deduction. Advisors warn against choosing a HELOC simply for the benefit of tax deduction, as many other deals also provide similar tax advantages.

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Is a Home Equity Line Of Credit Tax Deductible?

Understanding Home Equity Line of Credit

Understanding Home Equity Line of Credit
By John Glasburg

Home equity line of credit (HELOC) functions more like a typical variable rate credit card. You are allowed to borrow up a specific amount of money - your credit limit - and you may tap the credit anytime you want, usually by making a check.

Typically, the lender calculates the sum of your credit line based on the percentage (generally between seventy-five and eighty percent) of your house's appraised value and then subtracts it with the outstanding balance of your current mortgage. Your lender also evaluates your credit score and/or credit history and reviews your overall financial condition.

If you have to repay the home equity loan by paying fixed monthly payment that include both principal and interest, then with a HELOC you generally have the option to make a payment only on the interest each month or paying principal and interest on the debt.

If you choose to make interest-only payment, the payment amount depends on the current interest rate and also the amount of your total credit limit. Say, if your HELOC is $30,000 but you have borrowed only $10,000, the interest is calculated only on the $10,000.

The actual problem with paying only the interest is that the more time the principal is left unpaid, the more the HELOC costs you, particularly if the interest rate begins to rise.

Also, if the HELOC expires after a specific number of years and there are no provisions for renewing it, your lender will probably ask you to pay the entire amount you still owe based on a lump sum payment, also called as a balloon payment and if you can't afford to pay then you may lose your property.

Federal law necessitates lenders to cap the rate of interest they charge on your HELOC. Before you sign the HELOC-related paperwork, you should get clear on the interest rate cap. Also, ask if you can convert your HELOC for a fixed interest rate.

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Understanding Home Equity Line of Credit