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January 2000 MAKE PERSONAL INTEREST DEDUCTIBLE Many individuals
and families (particularly those with school-age children), use
personal loans or credit cards to buy cars or vans, finance private
schooling, take vacations, etc. There's a way to convert your nondeductible interest payments into a deductible expense. You can get this tax break if you own your own home. Specifically, you can take out a home equity loan (in the normal way, from your bank for example) and use the proceeds to pay off your nondeductible debts. You will probably be paying at a lower rate, since many lenders are charging near prime on these loans. And the interest payments will be deductible even though you don't use the loan for anything connected with the house. Of course, before you borrow against the equity in your personal residence, you should be certain that you actually get the tax deduction benefit. As always, there are various technical restrictions and limits that may apply, depending on your particular tax facts and circumstances. First, the loan must be "secured" by your residence. That is, the lender must have a mortgage interest in it. Don't confuse so-called "home improvement" loans, which are just one type of personal loan, with qualifying "home equity" loans. The interest on an unsecured home improvement loan isn't deductible. Second, the residence securing the debt must either be your principal residence (essentially, the home you live in most of the year) or a single second residence, for example, a vacation home which you use for at least part of the year. If you own more than one "second" residence, a home equity loan secured by only one of them (your choice) can qualify. Third, although the proceeds of a home equity loan don't have to be used on the home, there are limits on the amount of debt that can qualify. Specifically, qualifying home equity debt can't exceed the lesser of (a) $100,000, or (b) the fair market value of the home reduced by the "acquisition debt" (generally, your first mortgage). For example, say a homeowner has a $200,000 first mortgage on his home which is valued at $300,000. All of the interest on a $100,000 home equity loan would be deductible (as well as the interest on the first mortgage, of course). We would be happy to personally go over all of these rules with you to see if the home equity technique -- or other tax-saving strategies that your financial situation may suggest -- will work for you. Please call us if you would like to discuss the details of your particular circumstances.
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