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I'm considering increasing the line of credit we've had since '96 or '98. We're nearing the end of the payout period and our equity has grown quite a bit in the last 10 or so years. We've never used the entire amount, but we're looking at some much-needed remodeling.

I sort-of understand that there's a $100K limit for deductiblity of interest, and that there's also an AGI limit for deduction issues as well.

I'll look into getting the appropriate IRS pubs (936, and maybe 17, right?), but the resident "Pros from Dover" here on the board explain things so much more clearly.

If, for example, we get the HELOC increased to $150K, but use less than $100K, is all the interest deductible (within AGI limits, of course)? If we use more than $100K, is there deductiblity up to the $100K and limited deductibily over the $100K or maybe no interest is deductible over the $100K? I realize the whole question is moot if we keep the HELOC under $100K, but having access to more might meet certain needs.

Apologies if I'm not making sense, but I confuse easily.

TIA ~~ Alison
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If, for example, we get the HELOC increased to $150K, but use less than $100K, is all the interest deductible (within AGI limits, of course)? If we use more than $100K, is there deductiblity up to the $100K and limited deductibily over the $100K or maybe no interest is deductible over the $100K? I realize the whole question is moot if we keep the HELOC under $100K, but having access to more might meet certain needs.

The credit limit on your HELOC is irrelevant. Only the amount of principal outstanding counts. Ignoring AGI phase out rules, interest on up to 100K of equity borrowing is deductible, interest on the excess beyond 100K is not deductible. There is no phase out. I wouldn't worry about AGI phase out rules with regard to your HELOC since the phase out rules apply to all of your mortgage interest (technically to your itemized deductions), not just the HELOC interest.

Ira
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Ira,

The interest on a mortgage for the acquistion is deductible upto limits that probably has never limited anyone here. Is the interest on a mortgage used only for remodeling all restricted to the first $100,000?

Debra
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The interest on a mortgage for the acquistion is deductible upto limits that probably has never limited anyone here. Is the interest on a mortgage used only for remodeling all restricted to the first $100,000?

If the money is used to remodel, then to the extent the remodeling was a capital improvement, it would be considered acquisition debt and not equity debt. The deductibility of mortgage interest on acquisition debt is capped at $1 million of principal. See IRS Pub. 936, Home Mortgage Interest Deduction, www.irs.gov/pub/irs-pdf/p936.pdf for more information including what expenses qualify as capital improvements and what expenses do not.

Ira


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I posted this somewhere in the depths of the TMF boards. This is a good summary of the interest deduction rules tied to a home.

Mortgage interest deductions fall under itemized deductions: you must itemize deductions and have enough to exceed the standard deduction to benefit in the form of reduced tax liability.

(a) Mortgage interest is deductible on only the primary and one secondary home (the combined total of the debt).

(b) The deduction is limited to the first $1,000,000 of qualified acquisition debt.

(c) The deduction for home equity debt is limited to the lesser of the interest on: (1) the FMV of the home minus total acquisition indebtedness, or (2) $100,000 for the main and second homes combined.

(d) Rules for a second home:
(1) If a second home is rented, the taxpayer must use it more than 14 days or 10% of the number of days the home is rented (at FMV), whichever is longer.
(2) More than one second home: You can only treat one as a qualified second home for the year, and you can choose a different one each year if neither of the second homes is rented out.

(e) If a home is used for business and personal use, only the portion used for residential living counts as a qualified residence.

(f) Loan origination fees, maximum loan charge, loan discount, and discount points may be tax deductible in the year paid if secured by the principal residence. Loan origination fees (or points) paid in connection with home mortgage for purchase or improvement of, and secured by, principal residence, deductible in year paid to extent it is an established practice in area and amount does not exceed that generally charged in the area. Points paid on the refinance of a mortgage on a personal residence may be amortized over the life of the new mortgage, or until the loan is paid off. When loan refinanced or paid off, may deduct any unamortized points from a previously refinanced loan.

(g) If a seller pays points, they are deductible by the buyer in the year paid, but the buyer must reduce the basis in the home by the amount paid by the seller.

Bill
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