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June 14, 2022 | Posted in:

The Pros and Cons of Home Equity Debt: What You Don’t Know Could Cost You

While most interest expense is no longer tax deductible, home equity loan interest may be. It all depends on how the money is used.

 

Home acquisition debt:

Interest on debt used to purchase, refinance or substantially improve a primary or secondary residence is deductible. The limit is the fair market value of the property up to $750,000 ($375,000 if married filing separately).

 

Home equity debt:

This is all other debt secured by your primary or secondary residence. One of the pitfalls is using the loan for anything other than buying, building or substantially improving a residence. Doing so will cause the interest to be nondeductible. A few examples: consolidating credit card debt, financing a business or college costs, purchases like jewelry, travel, and cars, and more.

 

The pitfalls:

All too often home equity loans and their interest become a problem when:
• The loan interest is disallowed because it is not secured by a main or second home.
• The outstanding loan balance exceeds the fair market value of your house.
• If you use your home as a home office or as rental property, the interest becomes a business expense, not an itemized deduction.
• Total acquisition debt exceeds $750,000 ($375,000 if married filing separately.)
• You refinance to pull out equity. This creates additional leverage on your property and could cause you to surpass the debt limit AND require mortgage loan insurance.

 

Loans secured by your home can still provide a valuable tax deduction, but you must stay vigilant to the rules.

 

This article is from Alloy Silverstein’s Summer 2022 Client Alert newsletter. Download the full issue or subscriber to future enewsletters at our Publications page.

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