Home equity loans have tax limits too

Posted by charles dennis

June 8, 2007

If you are like me, the range of financial advise you have heard over the years when it comes to how to take proper deductions on your taxes ranges the gambit from writing off money given to the guy outside of the 7-11 to not having to pay the IRS any taxes because the laws are “allegedly” illegal. I came across a solid article that goes into detail of deducting interest accrued from a home equity loan that you may want to know about:

The state of California recently reviewed a sample of state tax returns which claimed large mortgage interest deductions and found that 75% of the tax returns had claimed excessive interest deductions. There are rules that limit how much interest you can deduct for your mortgage and other monies borrowed against your house. However, historically, only the extremely wealthy would run up against these rules. Today with so much home equity, particularly in some of the more expensive coastal areas, many people are running afoul of the rules and don’t even realize it.

Most notable is that you can only deduct the interest on the first $100,000 that you borrow against your house for things other than home improvements. Also, when it comes to Alternative Minimum Tax (AMT), home equity interest deductions are completely disallowed. The state of California is cracking down on these deductions and is starting to do a large amount of audits on taxpayers with large mortgage interest deductions. It is likely that other states and the Federal government will follow suit, so it is a good idea to make sure you are aware of the rules. If you have been using your house as an ATM, that is when you really run into trouble. Here is a quick rundown of the rules when it comes to mortgage deductions. More….