EchoBay Expert: Can the interest from home equity loans be deducted on my tax return?
Loyal Reader: Yes, but there are certain exceptions. First, you can only deduct interest on loans that do not exceed the value of your home. If your home is worth $200,000 and you owe $215,000 in total loans (whether it is your first mortgage or home equity loans), you can only deduct interest for the first $200,000.
Second, you can generally only deduct interest on home equity loans of $100,000 or less. This applies no matter how many home equity loans you have or how many homes they are secured against. The IRS only allows interest deduction for the first $100,000.
One of the most appealing reasons of the home equity loan is that the loan purpose doesn't have to have any thing to do with your home but you can still deduct the interest as if it did. Does your daughter want to go to Harvard? In most cases, $100,000 in tuition expense received through your home equity loan can be deducted on your taxes.
But if you decide to use your home equity loan to improve your home, you can generally disregard the $100,000 rule. When you use the money to make substantial improvements to your home, the IRS views it the same as first mortgage debt.
This means you can deduct up to $1,000,000.As you can see, the rules for deduction depend on your situation. As you've heard many times before - consult your tax advisor before you take the leap.