All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Pioneer
Posts: 1
Registered: ‎08-02-2017

Claiming home equity loan interst

Good Morning,

 

I am in the process of pulling out a 150k home equity loan, secured against our house which is paid off. The majority of the loan will be for home improvements. Am I eligible to claim this interest on my taxes? From my understanding, you can only claim 100k (filing jointly) if the loan IS NOT used for home improvements. How exactly does IRS know what the loan was used for?

 

IF you have a loan larger than 100k and you don't use for home improvements, can you still claim the 100k max, or are you no longer eligible to claim the interest?

 

Thank You

Tax Pro
Posts: 5,615
Registered: ‎02-23-2016

Re: Claiming home equity loan interst

Hi mthdwr,

 

Welcome to the H&R Block community.

 

The way this works is that you can treat the amount that was used to improve your home as acquisition debt which is outside of the home equity limit.  Then, the amount that qualifies as home equity debt on which you can deduct interest is limited to the smaller of (1) $100,000 for all filing statuses except for married & filing separately for which this amount is reduced to $50,000, or (2) the amount of your home's fair market value reduced by all outstanding acquisition debt.

 

So let's say that your home is paid for in full and you take out a $250,000 home equity loan and you use $120,000 to improve your home.  That $120,000 is treated as acquisition debt.  Let's say that your home's fair market value is $180,000.  Therefore your limit on home equity debt is $100,000 or $60,000 ($180,000 - $120,000), whichever is less.  So you can treat $60,000 as home equity debt.  In this scenario, you can deduct the interest on a total of $180,000.  The interest on the remaining $70,000 of the borrowed funds is not deductible.

 

The amount you can deduct the interest on will depend on what you do with the money.  In your own scenario, if you do not use any of the money for home improvements then, since you will have no outstanding acquisition debt without using some of the money for home improvements and assuming that the fair market value of your home is more than $100,000, you can deduct the interest on the first $100,000 that you borrow.

 

If you do use the majority of the loan for home improvements then some of the debt will be treated as acquisition debt and you may be able to deduct the interest on more than $100,000, but you'll have to go through the above calculation to know for sure.

 

If you have any other questions I'll be glad to help.

 

Louis,

Senior Tax Advisor (Tampa, FL)