| One of the biggest advantages that home equity loans | | | | interest rate can only be deducted from home equity |
| offer is the deductibility of the interest rate. However, | | | | debt that is not exceeding the owner's equity in the |
| many debtors don't fully recognize the limitations that | | | | house. Therefore, if a debtor owns a house worth |
| are set on these deductions and how proper allocation | | | | $300,000 and $250,000 is secured with a home |
| of such loans can qualify them for the deductions. | | | | acquisition debt and a debtor borrows additional |
| There are two types of mortgage loan interests. The | | | | $50,000 through home equity debt, the interest from |
| first one is the interest from home acquisition debt | | | | the $250,000 and $50,000 would be deductible. But if |
| which is used to buy, build, or substantially improve a | | | | the value of the house drops to $270,000 the interest |
| house. The second one is the home equity debt which | | | | on the $250,000 home acquisition debt would still be |
| is not used to buy or build a home. The intent and | | | | deductible, however only the interest from $20,000 |
| actual use of the loan dictates how the loan is treated | | | | (270,000-250,000) of the home equity debt would be |
| for income tax purpose. | | | | deductible. |
| Debtors can deduct interest from home acquisition | | | | Debtors also have to consider whether they fall under |
| debt that is up to $1,000,000. However, they can only | | | | the alternative minimum tax or the itemized tax regime. |
| deduct interest from home equity debt that is up to | | | | Only the itemized tax regime will allow debtor to |
| $100,000. Borrowing $120,000 for debt consolidation will | | | | deduct the home equity loan interest. Keeping this in |
| not allow the debtor to deduct the interest from the | | | | mind, the tax factor may not apply to a debtor at all, |
| extra $20,000, unless the $20,000 is used to | | | | and in this case it might make more sense to use |
| substantially improve a house. | | | | other types of loans, instead of putting your house as |
| Another limitation on the deduction of the interest rate | | | | collateral. |
| can be seen when the value of the house drops. The | | | | |