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Pass on the Tax

One of the greatest benefits of opening a home equity line of credit or home equity loan is the advantage of tax deductions.

With Countrywide, usually customers can take deductions from their taxes if they use home equity for home improvement, debt consolidation, for financing college and/or for making a purchase of assets for personal use.

Experts say that home equity credit used for home improvement is the best way to go and will almost always give you significant tax deductions. This is called acquisition indebtedness, and is used for projects such as building a house or making extreme improvements or renovations on your home.

They are seen in a similar light as first mortgages, and give greater leeway than home equity loans used for other purposes. Home improvement purposes allow people to deduct up to $1 million worth of their debt on first mortgages, while for other equity loans you can only deduct interest up to $100,000.

Be aware of the regulations, restrictions and exceptions to these tax deductions. If your home equity loan combined with your first mortgage raises your debt beyond the value of your home, you may not be able to take off taxes. If you have other options for money, you should probably take those options before home equity. It may be convenient but it does cost you, and it can become precarious when you don’t have the funds to pay it back. No one wants to incur additional debt.

Home equity is deducted from your gross income. You simply subtract the home equity loan amount from your gross income on the tax form.

To find out if you can receive tax benefits from your home equity loan or credit, find your schedule A on an IRS form and add up your eligible deductions, including home equity interest, mortgage, donations and medical expenses.

Next, calculate how much interest you have paid to your mortgage or equity lender and note that on the “interest you paid” line. Last, add up all your itemized deductions. If your deductions amount to more than the standard tax deductions for that year, you will have a sizable tax advantage.

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