Home equity interest is tax deductible under certain circumstances. Interest is an itemized deduction if you paid the interest, where legally responsible for the loan, and secured the loan with your home. If you don't meet these conditions, you can still deduct the interest, just under another category. Basic Requirements To Deduct Mortgage Interest The IRS has three basic requirements that you must meet in order to deduct mortgage interest. First, you have to be legally responsible for the loan. You can't deduct interest you pay for someone else's loan. The home equity loan also has to be a secured debt for a qualified home. It either has to be your main home or second property. It cannot be rented out or used for business purposes. If you do use a room as a business office, that part of the house can be written off as a business expense. The final requirement is that you file a 1040 with itemized deductions. Fully Deductible Interest Has Caps In most cases, you will be able to fully deduct the interest you paid on a qualifying loan. The loan has to be for the fair market value of the property or less. Loans originating prior to October 13, 1987 are automatically grandfathered in. Loans after 1987 have caps on qualifying loan amounts. If the home equity loan was taken out to purchase, construct, or improve a home, then it qualifies for the entire deduction up to $1 million when filing jointly. Home equity loans used for other purposes qualify for deductions up to $100,000. Special Cases For Interest Deductions The IRS has also made provisions for military personal and ministers. If you receive a non-taxed housing allowance, you can still deduct your mortgage interest. You can also deduct early payment fees for selling or refinancing your home. In some cases, late payment fees can also be itemized. Tax Laws Change Before taking any actual tax deduction, double check with IRS regulations to be sure you are in compliance. Each year tax laws change, so check either with the IRS publications or an accountant. They will be able to give you the most up to date information and possibly point out additional deductions. |
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