Write From Home
P.O. Box 4145
Hamilton, NJ 08610
E-mail: kim @ writefromhome.com
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.
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.
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.
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
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
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
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.
Copyright © 2004 Julian Block. All rights reserved.
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:
Washington Square, #1-G
Larchmont, NY 10538-2032.
Contact him at
New to freelance writing?
this informative article.
Glossary of Writing Terms
(Electronic & Print)
Job Boards &
Research & Reference
Writer Web Sites