What kinds of interest are deductable on your taxes?
15 August 2006SmartMoney has an article answering this important question. The short answer: you can deduct interest on your first home, a second home, student loans, and loans for many investment or business purposes. Keep in mind that there is a long answer for each of these that is generally much more complicated – we’re talking about taxes, after all.
One good strategy the article refers to is borrowing against your home to pay off your non-deductable debts. This is a great idea, so long as you don’t use it as an excuse to go rack up MORE debts (which many people do). If you’ve got credit card debt, car debt, and spare home equity, however, your best option is to borrow against your home to pay off those debts. You then generally pay lower interest and get to deduct the interest you pay. The caveats:
First, the home-equity debt, when piled on top of your “regular” mortgage, cannot exceed the fair market value of the property. So you can’t write off all the interest on those 125% home-equity loans you see promoted on TV. For example, say your first mortgage is $150,000 and your casa is worth $225,000. You may be able to get a $100,000 home-equity loan, but you can only deduct the interest on $75,000.
Second, interest on home-equity loans is deductible for alternative minimum tax (AMT) purposes only if you use the proceeds to acquire, construct or improve a first or second residence. So if you are in the AMT mode, you should understand that you may not get any tax benefit if you take out a $50,000 home-equity loan to buy a new BMW and pay for your kid’s braces. On the other hand, if you spend the $50,000 to put in a deluxe swimming pool and spa alongside your house, you can deduct the interest under both the regular tax and AMT rules.
Discuss this on the Free the Drones Financial Forums here.
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