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?
You are not sure what I am talking about
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.
When you refinance on your home and use the money for any reason other than home improvement, the IRS limits your deduction for interest. In some cases you won't be able to claim the deduction at all.
Well, the way this is set up, the IRS in general does allow you to deduct interest on your HELOC for tax purposes. They call this the home equity indebtedness deduction.
The home equity indebtedness means:
The IRS generally gives you a deduction based as follows: You are allowed to claim mortgage interest deduction up to $100,000 if you file a joint return or up to $50,000 if you file a separate return. This relates to refinancing or borrowing extra from your mortgage.
Here is what the IRS does to limit your deduction.
Let us look at the following example to see how this works.
Let us make an assumption that you owe $260,000 on your mortgage and that you bought your home for $300,000.
Now assume at this point in time you decide to borrow against your home and take out an additional $30,000 from your HELOC. The key question is, are you allowed to deduct the interest paid on the $30,000 as a mortgage interest tax deduction? Let's make one more assumption that your home is valued at $320,000 the day you decide to borrow money from your HELOC.
You may be in for a surprise. If you previously claimed a deduction or thought of claiming a deduction this year, the IRS may limit your interest deduction lowering your refund.
The best way to figure out what you can deduct is to do a simple calculation. According to the IRS you need to take the value of your home ($320,000) and from this you deduct the cost of your home ($300,000). The difference of ($20,000) is what you are able to claim as an interest deduction. You thought you may claim the entire $30,000 but as you can see the IRS limits this.
Now here is the biggest surprise of all. If you home is currently worth less than what you bought this for, you cannot claim interest on the borrowed money if you use the money for personal reasons. So for example if you bought the home for $300,000 and it is now fallen down in value in this market, and the value is $280,000, the IRS prevents you from deducting the interest you borrowed on the $30,000. Bad news, especially in this year when the home prices have fallen, you may not be able to claim a deduction for interest when you borrowed on the HELOC.
How do you know if you are caught up in this tax trap?
Please click on the links below and quickly access a list of points or a special check list. In this list, we have provided the steps preventing you from making a silly mistake when preparing 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. - 16477
You are not sure what I am talking about
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.
When you refinance on your home and use the money for any reason other than home improvement, the IRS limits your deduction for interest. In some cases you won't be able to claim the deduction at all.
Well, the way this is set up, the IRS in general does allow you to deduct interest on your HELOC for tax purposes. They call this the home equity indebtedness deduction.
The home equity indebtedness means:
The IRS generally gives you a deduction based as follows: You are allowed to claim mortgage interest deduction up to $100,000 if you file a joint return or up to $50,000 if you file a separate return. This relates to refinancing or borrowing extra from your mortgage.
Here is what the IRS does to limit your deduction.
Let us look at the following example to see how this works.
Let us make an assumption that you owe $260,000 on your mortgage and that you bought your home for $300,000.
Now assume at this point in time you decide to borrow against your home and take out an additional $30,000 from your HELOC. The key question is, are you allowed to deduct the interest paid on the $30,000 as a mortgage interest tax deduction? Let's make one more assumption that your home is valued at $320,000 the day you decide to borrow money from your HELOC.
You may be in for a surprise. If you previously claimed a deduction or thought of claiming a deduction this year, the IRS may limit your interest deduction lowering your refund.
The best way to figure out what you can deduct is to do a simple calculation. According to the IRS you need to take the value of your home ($320,000) and from this you deduct the cost of your home ($300,000). The difference of ($20,000) is what you are able to claim as an interest deduction. You thought you may claim the entire $30,000 but as you can see the IRS limits this.
Now here is the biggest surprise of all. If you home is currently worth less than what you bought this for, you cannot claim interest on the borrowed money if you use the money for personal reasons. So for example if you bought the home for $300,000 and it is now fallen down in value in this market, and the value is $280,000, the IRS prevents you from deducting the interest you borrowed on the $30,000. Bad news, especially in this year when the home prices have fallen, you may not be able to claim a deduction for interest when you borrowed on the HELOC.
How do you know if you are caught up in this tax trap?
Please click on the links below and quickly access a list of points or a special check list. In this list, we have provided the steps preventing you from making a silly mistake when preparing 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. - 16477
About the Author:
If you have refinanced and used the proceeds for personal use and looking for free turbo tax I encourage you to download the free list of tax deductions checklist for the above topic.
No comments:
Post a Comment