Write From Home-Self-Home Equity Loans: Money Under Your Nose

Home Equity Loans: Money Under Your Nose
by Julian Block

In this time of constant change, there are still two things that stay the same: The tax collectors want more of your hard-earned money. And you want to keep more of it for the things you need. So it pays to consider the tax consequences beforehand as you make those everyday financial decisions, whether it be to go ahead with that much-needed facelift for your kitchen or for yourself.

Be particularly mindful of how to use the tax rules to best advantage if you are a homeowner who has sizable outstanding loans. Because of restrictions on interest deductions, it could make sense to consolidate your debts and thereby reap a double benefit: to be able to borrow at a lower rate, and gain a tax deduction, too. In fact, your home, whether a house, condo or co-op apartment, could open the door to one of your smartest money moves right now.

For starters, let's look at how the rules were tightened and then slightly relaxed. Previously, you could deduct all interest payments on "consumer" loans. Now, however, you get no deduction for consumer interest, a wide-ranging category that includes charge account and credit card balances, auto loans, and other personal debts, such as overdue federal and state income taxes. There is, though, a limited exception for interest on student loans.

Fortunately, most homeowners can sidestep the interest-deduction restrictions. You are still able to deduct 100 percent of the interest charges on as much as $1,000,000 of mortgage loans incurred to buy, build or improve your year-round residence and one other home, such as a vacation retreat.

Moreover, you can deduct 100 percent of the interest on up to an additional $100,000 of loans secured by your home, with no restrictions (other than the purchase of tax-exempt obligations) on how you use the loan proceeds. These borrowings are known as home equity or tax-advantaged loans.

The home-mortgage-interest rules create a unique double benefit, should you tap the equity built up in your home. First, deducting the interest saves federal, as well as state and city income taxes, depending on where you live or work. Secondly, you borrow for less. How come? Because lenders furnish home equity loans at much lower interest rates than for comparable unsecured consumer loans.

Bottom line: Getting the things you need today needn't mean you're saddled with high interest rates. Instead, it can mean trimming taxes considerably, courtesy of a tax- advantaged loan.

How, then, does going this route help you? Many financial planners and tax advisers counsel clients to convert nondeductible consumer loans into less expensive, fully deductible, home equity loans. As long as the mortgage-interest rules remain unchanged, this strategy keeps more money in your pocket for this and later years.

Note, too, that debt consolidation is not the only reason to use tax-advantaged loans. Other borrowing needs might include such "big ticket" items as autos or furniture.

Home equity loans are not without some risk, however. Because there is a lien of your home, the lender has the option to foreclose on your property if circumstances prevent you from repaying the loan. So it's important to calculate accurately your ability to repay any loan for which your home is collateral. If you feel uncomfortable with this type of risk, take a look at other borrowing alternatives.

Julian Block is a syndicated columnist, attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." His "Tax Tips For Freelance Writers, Photographers And Artists" shows how to save truly big money on taxes—legally—and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. Send $9.95 for an e-mailed copy or $14.95 (in the U.S.) for a postpaid copy to:

J. Block
3 Washington Square, #1-G
Larchmont, NY 10538-2032.

Contact him at julianblock@yahoo.com

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