Good Monday Morning!
With our current slower economy and the continued inflation we are suffering through, many homeowners are cashing in on their home equity for a variety of reasons. Some are using the home equity that increased significantly prior to our current recession for home improvement, to pay off debt, to purchase autos, RV's or even take vacations. Home equity loans, "Helocs" are a great tool and and can certainly be used as a aid to help homeowners. But, beware of how you use a "Heloc". There are some potentail pitfalls with using your home equity. The following article from "Realtor.com" will tell you about some of the "Heloc" benefits and some of the "Heloc" dangers.
Do you have a home equity loan or home equity line of credit (HELOC)? Homeowners often tap their home equity for some quick cash, using their property as collateral. But before doing so, you need to understand how this debt will be treated come tax season.
With the 2017 Tax Cuts and Jobs Act, the rules of home equity debt changed dramatically. Here’s what you need to know about home equity loan taxes when you file this year.
Acquisition debt vs. home equity debt: What’s the difference?
For starters, it’s important to understand “acquisition debt” versus “home equity debt.”
“Acquisition debt is a loan to buy, build, or improve a primary or second home, and is secured by the home,” says Amy Jucoski, a certified financial planner and national planning manager at Abbot Downing.
That phrase “buy, build, or improve” is key. Most original mortgages are acquisition debt, because you’re using the money to buy a house. But money used to build or renovate your home is also considered acquisition debt, since it will likely raise the value of your property.
Home equity debt, however, is something different.
“It’s if the proceeds are used for something other than buying, building, or substantially improving a home,” says Jucoski.
For instance, if you borrowed against your home to pay for college, a wedding, vacation, budding business, or anything else, then that counts as home equity debt.
This distinction is important to get straight, particularly since you might have a home equity loan or HELOC that’s notconsidered home equity debt, at least in the eyes of the IRS.
If your home equity loan or HELOC is used to go snorkeling in Cancun or open an art gallery, then that’s home equity debt. However, if you’re using your home equity loan or HELOC to overhaul your kitchen or add a half-bath to your house, then it’s acquisition debt.
And as of now, Uncle Sam is far kinder to acquisition debt than home equity debt used for non-property-related pursuits.
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