Taxes can bite borrowers of home equity loans

Happy Thanksgiving!

(Flickr photo by The Suss-Man (Mike)

Home equity loans have regained some of their popularity in the wake of the housing crisis.

But borrowers need to be clear about the extent of their tax deductibility — at least until (and if) Washington completes wrangling over the deficit.  You’ll find the nitty-gritty in a 16-page PDF published by the IRS, from which I’ll try to furnish just the broadest of strokes.

In essence, you can deduct no more than $100,000.  Except. . .

That $100,000 limit can drop depending on the fair market value of your residence.

You may deduct no more than the difference between the fair market value and the amount of the mortgage you received to buy the place up to $100,000.

In an IRS’ example, say your home now is worth $110,000.  And imagine that your mortgage — formally, “acquisition debit” — was $95,000.

Maybe you borrow $42,000 as a home equity line of credit (HELOC).  You cannot deduct the interest on $42,000, only $15,000, which is the difference between $110,000 and $95,000.

Writing in the Washington Post, real estate attorney Benny Kass cites an exception.  In his understanding, a borrower whose total loans to acquire and improve a home fall below the $1 million cap for interest deductibility may exceed $100,000 for a HELOC so long as both loans together don’t go above that $1 million limit.

In other words, as I read Kass, you can take advantage of the tax benefit if your loans both to purchase and renovate your home don’t exceed $1 million.

If nothing else, the rules underscore the complexity of a tax code in need of reform for simplicity’s sake alone.  Whether the Congress will decide that the HELOC interest deduction is a loophole to be closed remains to be seen.

Until then, the wise homeowner would do well to avoid a tax bite that results from a lack of awareness of the current rules.

Next: Out and About on Monday

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

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