miOaklandCounty.com

Yahoo News featured an article that covers tax deductions for home equity lines and luxury homes. Its worth a few minutes of your time if you have a large home equity line, vacation home or a luxury home. Here is the full article.

Here are a few of the highlights…

“Home equity loans are a thorny area. Consider the taxpayer who’s got oodles of equity in her home. She’s probably already using a home equity line of credit for various purposes — but if she tries to deduct the interest from more than $100,000 of this debt, the IRS may not approve. Any home equity debt over $100,000 may or may not be deductible, depending on how the funds are used.

Suppose you already have $100,000 in home equity debt on your home. If you pull out another $70,000 to put down on a rental property, that interest will be deductible — as rental interest expense, not home mortgage equity interest. But if you pull out that same $70,000 to buy that cute little Mercedes Benz you’ve had your eye on, no deduction for you.

The news gets worse. To assure the IRS that you’re properly allocating your home equity interest in the proper classifications, you must follow the ‘interest tracing rules.’ The IRS usually categorizes interest depending on how a taxpayer uses the loan or debt proceeds, regardless of what got used as collateral. For example, interest on a loan used to pay for a personal vacation isn’t considered deductible, even if the loan is secured by investment property or property used in the taxpayer’s trade or business.

The interest tracing rules are complicated. Very complicated. But in effect, in order to deduct interest on more than $100,000 of a home equity loan, you have to prove that the funds you borrowed can be directly tied to how you used them. That means keeping the borrowed funds separate from the rest of your money. If you commingle borrowed funds in your personal account, or even between multiple personal accounts, they tend to lose their identity”

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Written by Maureen Francis
SKBK Sotheby's International Realty, 248.430.4450
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