When taking out a home equity line of credit (HELOC), it is important to understand the potential tax implications. Funds received through a HELOC are not considered taxable income, as they are borrowed money and not an increase in earnings. In some areas, a mortgage registration tax may be required when applying for a home equity loan. However, HELOC interest may be tax-deductible if it meets Internal Revenue Service (IRS) guidelines. To qualify for the deduction, the loan must not exceed established loan limits and must be used to buy, build, or improve a home.
It cannot be used for personal expenses or to consolidate credit card debt. The interest on a home equity loan is tax-deductible as long as the funds have been used for the aforementioned purposes. When selling a property that has been inherited, taxes may be due on the difference between the value of the home when it was inherited and when it was sold. If you need a large amount of cash to finance an improvement or repair to your primary residence, and you are itemizing your deductions, then a HELOC or home equity loan may be a good option from an economic standpoint. However, according to IRS rules, you must have used the capital to buy or build a home or substantially improve your current home to apply for the tax deduction. Mortgage interest is one example of a tax deduction that can be taken advantage of when using the capital of your home.
Property taxes and mortgage points may also be written off if you are in your primary residence. Additionally, if your home meets the eligibility requirements to be a primary residence, you may be able to exclude a certain amount of capital from taxation as a profit.
