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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