Home equity loans have grown in popularity for many reasons. One of the main reasons is that home equity loans can be used as a tax deduction. However, some borrowers don’t know about this option and end up not taking advantage of it. This blog article discusses the home equity loan tax deduction and how it applies to homeowners, especially those who are self-employed or farmers.
What is a Home Equity Loan?
A home equity loan is a loan that you take out to use your home’s equity as collateral. You can use the money you borrow to buy, improve, or refinance your home. The interest on a home equity loan is typically tax-deductible.
Home Equity Loan Tax Deduction
When you take out a home equity loan to purchase, improve, or rebuild your home, you may be able to deduct the interest paid on the loan from your taxable income. Here are some things you need to know about the home equity loan deduction:
First, you need to qualify for the home equity loan deduction. To do this, you must meet two requirements: you must own your home and your mortgage must be less than 80% of the value of your home. If your mortgage is more than 80% of the value of your home, you cannot deduct the interest on the loan.
Second, you must use the borrowed money to increase your home’s value. This means that you cannot use the money to cover general living expenses (like groceries), pay off other debt, or purchase another property. In addition, you cannot use the money to fix up or improve your home for sale. You can only use it to buy, improve, or refinance your home.
Finally, you must repay the loan within 30 years. If you don’t repay the loan in full and on time, you still have to include the interest in your income. This is true even if your home goes into foreclosure. You are required to make good on your debt while it’s still yours. If you default, you will lose the right to deduct the interest on the loan. In addition, any additional interest that accrues at this point will be due and payable.
How to Claim the Home Equity Loan Tax Deduction
If you itemize your deductions, you can claim a deduction for the interest paid on your home equity loan. The amount of the deduction is based on how much of the home equity loan is used to improve your home.
To qualify for the deduction, you must itemize your deductions and include the interest paid on your home equity loan in your total deductions. The interest paid on a home equity loan is deductible even if you don’t use the entire amount of the home equity loan to improve your home.
You can claim the deduction if you are single, married filing jointly, or qualifying widow(er), and your modified adjusted gross income (MAGI) is less than $100,000 ($75,000 if you are age 65 or older). You can also claim the deduction if any of the following applies: You are a qualified veteran
Your MAGI is less than $160,000 ($125,000 if you are age 65 or older)
Your mortgage is not more than 100% of the value of your home
Your primary residence is used as your principal place of residence
The home equity loan was taken out before November 4, 2008.
Wrapping It Up
If you are looking to take the home equity loan deduction on your federal tax return, there are a few things you need to know. In this article, we will cover the basics of what counts as a home equity loan, how much you can deduct, and some other important factors to consider. Armed with this information, hopefully, you will be able to get the most out of taking advantage of this valuable deduction. Thanks for reading!