| Category | Debt + Personal Loan | HELOC |
|---|---|---|
| Total Debt Amount: | $19,000.00 | $19,000.00 |
| Monthly Payment: | $1,107.00 | $82.69 |
| Average Interest Rate: | 9.55% | 3.25% |
| Payoff Timeline: | 1 Yrs 7 Mts | 30 Yrs 0 Mts |
| Total Monthly Payments: | $20,510.12 | $29,768.11 |
| Total Interest Paid: | $1,510.12 | $10,768.11 |
| Total Deductible Interests: | $0.00 | $10,768.11 |
| Avg Annual Tax Savings: | $0.00 | $89.73 |
Understanding the Income Tax Implications of Tapping Home Equity
Prior to the passage of the Tax Cuts and Jobs Act of 2017 interest on up to $100,000 of second mortgage debt via home equity loans or HELOCs was tax deductible no matter how the money was used. The law changed how mortgage debt is treated based on how loan proceeds are used.
Home equity debt which is taken out to pay for things other than making substantial improvements to the home (which improve the basis of the home) is no longer tax deductible, as it is not considered acquisition indebtedness.
If you are not using the HELOC or home equity loan to improve or expand the dwelling or you do not plan on itemizing your income taxes please set your federal tax rate to zero to remove income tax breaks from your calculation.
When is Interest on Second Mortgages Considered Tax Deductible?
If home equity debt is taken on in a format which is considered origination indebtedness then interest on the loan may be considered tax deductible. In general things which qualify as origination indebtedness include money used to acquire, build, or substantially improve the primary residence that secures the loan.
IRS publication 936 explains how the home mortgage interest deduction works. It is important to keep your receipts on your improvement purchases in case you are audited. Please speak with your accountant if you have questions about what types of home improvements qualify.
HELOC stands for Home Equity Line Of Credit. HELOC is an option you might want to consider if you have certain amount in your home equity and your debt payments are more than you can afford to make each month. In addition, it can help you lower your interest rate on those same debts. To get an idea of how HELOC can affect you and your debt, let's take a look at an example.
If you have $19,000.00 in debt from a variety of loans with different interest rates, it might take you 1 year(s) and 7 month(s) to pay it off if the average interest rate of these loans is 9.55% and you are paying $1,107.00 per month. With HELOC, you would have a 3.250% interest rate and your monthly payments would drop dramatically to $82.69, though it will take you 30 years to repay the debt.
By paying off your loans without HELOC, your $19,000.00 loan will cost you a total of $20,510.12 to repay. Through HELOC, it will total $29,768.11.
Understanding the Income Tax Implications of Tapping Home Equity
Prior to the passage of the Tax Cuts and Jobs Act of 2017 interest on up to $100,000 of second mortgage debt via home equity loans or HELOCs was tax deductible no matter how the money was used. The law changed how mortgage debt is treated based on how loan proceeds are used.
Home equity debt which is taken out to pay for things other than making substantial improvements to the home (which improve the basis of the home) is no longer tax deductible, as it is not considered acquisition indebtedness.
If you are not using the HELOC or home equity loan to improve or expand the dwelling or you do not plan on itemizing your income taxes please set your federal tax rate to zero to remove income tax breaks from your calculation.
When is Interest on Second Mortgages Considered Tax Deductible?
If home equity debt is taken on in a format which is considered origination indebtedness then interest on the loan may be considered tax deductible. In general things which qualify as origination indebtedness include money used to acquire, build, or substantially improve the primary residence that secures the loan.
IRS publication 936 explains how the home mortgage interest deduction works. It is important to keep your receipts on your improvement purchases in case you are audited. Please speak with your accountant if you have questions about what types of home improvements qualify.
