Do you know the fastest way you can get audited by the IRS, and slapped with interest and penalties when using a Home Equity Line of Credit?
Are you confused by what this means to you.
It is not your fault. You are not alone. We are told that HELOC interest is deductible for tax purposes but sometimes, especially in this economy, this may not be the case, and you could land up in serious trouble with the IRS.
If you borrow money from your HELOC and use this to spend on personal items other than home improvement, you will not be allowed to claim a deduction on the mortgage interest for tax purposes.
Here is how it works. The IRS starts by giving you a tax deduction for mortgage interest. There is a fancy name for this called the home equity indebtedness deduction.
The home equity indebtedness means:
If you are married and file a joint return you are generally allowed to claim a deduction interest up to $100,000 of the funds you borrowed. If you file separate tax returns the limit is $50,000. I am only referring to one aspect of the deductions here which relates to refinancing or borrowing extra from your mortgage. There are other deductions and incentives so please consult your advisor.
Like everything in life they give you something and then take it away.
The example below explains this in more detail
Let us assume at the time when you first acquired your home you paid $300,000. But now you only owe a balance of $260,000.
YOU took $30,000 from your HELOC and decided to use this for personal use. And you figured that since you borrowed the money from the HELOC the interest paid on the $30,000 is fully tax deductible. You also received some good news the day you borrowed this extra money. You were told that your home is valued at $320,000.
There is some bad news to this. The IRS does not allow you to deduct the entire interest on the $30,000.
You need to do a second quick calculation to find out the difference between the market value of your home and the costs plus improvements. In this example your market value is $320,000 and the cost is $300,000 so the difference is $20,000. This means is that even though you are allowed to claim up to $100,000 the IRS limits this and tells you that you can only claim interest on $20,000. So if you borrowed $30,000 and used this for personal use, the tax deduction for interest can only be claimed on $20,000. The interest you paid on the other $10,000 is disallowed.
Now if the market value of your home has decreased below the cost of your home, you cannot claim interest on any of the $30,000 you borrowed. I have seen hundreds of clients caught up in this potential tax trap and most of them have their taxes completed by their tax accountants. So if you home is worth $290,000 today and the original cost is $300,000, the entire interest you paid on the $30,000 you borrowed cannot be claimed for tax purposes.
How do you know if you are caught up in this tax trap?
Go to the url or the unique links below and gain access to a quick and easy checklist. In this document, we have given you suitable points to consider preventing you from making unnecessary mistakes when filling in your tax return.
I strongly recommend that you contact your tax accountant immediately if you have used your HELOC funds for personal use in the last year. This will ensure that you claim the right deductions and prevent yourself from being audited.
Please note that this article is for informational purposes only. No liability is assumed with the information presented above.
Are you confused by what this means to you.
It is not your fault. You are not alone. We are told that HELOC interest is deductible for tax purposes but sometimes, especially in this economy, this may not be the case, and you could land up in serious trouble with the IRS.
If you borrow money from your HELOC and use this to spend on personal items other than home improvement, you will not be allowed to claim a deduction on the mortgage interest for tax purposes.
Here is how it works. The IRS starts by giving you a tax deduction for mortgage interest. There is a fancy name for this called the home equity indebtedness deduction.
The home equity indebtedness means:
If you are married and file a joint return you are generally allowed to claim a deduction interest up to $100,000 of the funds you borrowed. If you file separate tax returns the limit is $50,000. I am only referring to one aspect of the deductions here which relates to refinancing or borrowing extra from your mortgage. There are other deductions and incentives so please consult your advisor.
Like everything in life they give you something and then take it away.
The example below explains this in more detail
Let us assume at the time when you first acquired your home you paid $300,000. But now you only owe a balance of $260,000.
YOU took $30,000 from your HELOC and decided to use this for personal use. And you figured that since you borrowed the money from the HELOC the interest paid on the $30,000 is fully tax deductible. You also received some good news the day you borrowed this extra money. You were told that your home is valued at $320,000.
There is some bad news to this. The IRS does not allow you to deduct the entire interest on the $30,000.
You need to do a second quick calculation to find out the difference between the market value of your home and the costs plus improvements. In this example your market value is $320,000 and the cost is $300,000 so the difference is $20,000. This means is that even though you are allowed to claim up to $100,000 the IRS limits this and tells you that you can only claim interest on $20,000. So if you borrowed $30,000 and used this for personal use, the tax deduction for interest can only be claimed on $20,000. The interest you paid on the other $10,000 is disallowed.
Now if the market value of your home has decreased below the cost of your home, you cannot claim interest on any of the $30,000 you borrowed. I have seen hundreds of clients caught up in this potential tax trap and most of them have their taxes completed by their tax accountants. So if you home is worth $290,000 today and the original cost is $300,000, the entire interest you paid on the $30,000 you borrowed cannot be claimed for tax purposes.
How do you know if you are caught up in this tax trap?
Go to the url or the unique links below and gain access to a quick and easy checklist. In this document, we have given you suitable points to consider preventing you from making unnecessary mistakes when filling in your tax return.
I strongly recommend that you contact your tax accountant immediately if you have used your HELOC funds for personal use in the last year. This will ensure that you claim the right deductions and prevent yourself from being audited.
Please note that this article is for informational purposes only. No liability is assumed with the information presented above.
About the Author:
If you have refinanced and used the proceeds for personal and looking for free tax software I encourage you to download the free property taxes checklist first for the above topic.
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