Home Equity Loan

There are any number of events like vacations, college tuition, or unexpected expenses that may arise and you need some extra money. If you own your home, a home equity loan may be the best source of funds. However, there are a few restrictions.

You may be able to deduct the interest on a loan you took out for reasons other than to buy, build, or substantially improve your home. To qualify as deductible, the interest for Home equity debt must be derived from a mortgage, other than home acquisition debt, that is secured by your qualified home.

There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:

$100,000 ($50,000 if married filing separately), or
The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt.

Interest on amounts over the home equity debt limit generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment or business purposes, the interest may be deductible.

Example A
Fair Market Value of Home:	$120,000
Amount owed on home:	$ 50,000
Net:	$ 70,000
The amount of interest you can deduct on home equity loans in this example is limited to $70,000 due to the limitation of number 2 above.

Example B

Fair Market Value of Home: $200,000

Amount owed on home: $ 0

Net: $200,000

The amount of interest you can deduct on home equity loans in this example is limited to $100,000 (or $50,000 if you are married filing separately) due to the limitation of number 1 above.

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