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Home Equity Indebtedness Mortgage Interest

May 27, 2008  |  Difficulty: Easy

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Along with being able to deduct the interest of your mortgage, you can also deduct the interest for home equity indebtedness. What is this? Home equity indebtedness mortgage interest is the second type of mortgage that is defined by tax code and includes all the monies borrowed for your primary residence that is not spent on acquiring, building or improving the property.

That terminology is a bit tricky. To break it down, home equity indebtedness is a home equity loan or a home equity credit line. These loans are typically used to purchase furniture, to help pay utilities or other expenses. Cash out-refinancing comes under the home equity indebtedness category as well. When the funds from borrowing are not used to significantly improve the home, it is titled home equity indebtedness.  

Why so much detail and trouble to differentiate between acquisition indebtedness and home equity indebtedness? It all comes down to the deduction limit. Home equity indebtedness has a deduction limit of $100,000; however, acquisition indebtedness has a deduction limit of $1million. If you have both of these debts, the total limit is $1.1 million, and the actual interest that needs to be deducted is unlimited!

However, there is a limitation. When you add your home equity indebtedness to your acquisition indebtedness, the total cannot rise above the complete value of the home when the loan was first obtained. To gain more information about this restriction, talk with a tax professional.  

In fact there may be other limitations that apply to you, such as the alternative minimum tax (AMT). If AMT applies to you, you are not able to deduct the interest from your home equity indebtedness. Before you make a choice on obtaining an equity loan, talk with a tax professional to see if you are able save money through deducting the interest.

Some may wonder if acquisition indebtedness applies after refinancing. The answer is, yes. If your mortgage was originally considered as acquisition indebtedness, then after refinancing it will continue to be the same.

However, if at the time of refinancing you borrow monies that exceed the original mortgage amount, the extra monies are considered home equity indebtedness. This rule will stand no matter what you are using the monies for. The only way the additional amount could possibly be treated as acquisition indebtedness is if you present full documentation that the monies were used for significant remodeling of the primary home.

The rules and regulations of mortgage and deductions can be very confusing at times. To make sure you are fully informed, seek the help of a tax professional.

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