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Can I deduct the interest I am paying on my home equity loan?
When you tap into your home equity by taking out a loan or setting up a line of credit for $100,000* or less, the interest is almost always tax deductible.
But use caution with these loans. In theory, they’re useful for consolidating debt, especially if you have high-rate credit card bills you’re anxious to pay off. But consolidating debts with a line of credit or a loan only works if you stop creating new debt. If you continue to charge items and carry a balance, your home equity loan or line of credit is just another way for you to get into further debt.
There are three things you need to consider if you want to borrow on your home equity:
1. Your home is collateral for any home equity borrowing. If you fail to make the payments, you could lose it.
2. You can deduct the interest on your home equity loan only if the total debt on your home, including the home equity loan, doesn’t exceed the fair market value of the home.
3. Unless you use the loan proceeds to buy, build, or improve your home, the interest on the loan is not deductible for purposes of the alternative minimum tax.
* If you are married and filing separate income tax returns, the loan amount is $50,000 or less.
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