Re: Taking our a Home Equity Loan to pay off debts
am 03.03.2006 00:19:44 von Gene wrote:
> Hello, I've been reading this book titled, "Missed Fortune 101 : A
> Starter Kit to Becoming a Millionaire" and in the book he suggests
> taking out a home equity loan to pay off debts, or use the money to
> purchase a car. In doing so you can deduct the interest on the loan, an
> auto loan with a bank you cannot deduct the interest from your taxes.
> What do you think of this idea? I have an auto loan with my bank and I
> was thinking about doing what the author suggests. Is this a good idea?
> Of course I would try to pay off this loan as soon as possible, but in
> the mean time I could deduct the interest.
>
> thanks,
> joe
You need to be VERY VERY careful with this, there are traps that most
people - INCLUDING PROFESSIONALS - miss.
First - be careful about using your home to secure a disposable asset.
If things get tight you can live with a car being repo'd, but to have
your house repo'd because you can't make a car payment is foolish.
Second - be careful about converting short term debt into long term
debt. A lower payment doesn't mean you're paying less - paying for a
car over 10 or 15 years is not a smart move.
Third (this is where a lot of pros fail to properly advise their
clients) - Mortgage proceeds that are used for anything other than the
acquisition or improvement of your home are a Tax Adjustment Item for
the Alternative Minimum Tax! You may be able to deduct the interest on
Schedule A - for mortgages up to $1M and for Equity Loans up to $100K -
but the mortgage interest gets added back when AMT is calculated.
Every year I get at least 6 clients who come in talking about how they
refinanced the house and took out enough cash to pay off the credit
cards, pay off the cars, buy new cars, go on vacation, put the kids
through school - whatever. The last couple of years, most start out
bragging that they actually took out $40K or $50K but their payment
actually dropped because of the lower interest rates. Then they sort
of go pale when they find out that the interest related to that portion
of the mortgage gets added back when we calculate AMT.
Lastly (this is another area when some pros drop the ball) - Mortgage
interest related to acquisition debt is deductible BUT once it is paid
down it can never be increased. For example - say you buy a house for
$500K; you have some proceeds from the sale of your old home so you put
$300K down and you finance $200K. Your acquisition debt is $200K. Now
you pay on that loan for 10 years then aunt tilly dies and leaves you
enough cash to pay off the balance - so you do.
Now its time for the kids to go to college; the house has increased in
value to $1M and it is paid for. So you decide to borrow $250K and put
little Johnny through Harvard.
The interest on the first $100K is deductible on Schedule A BUT is an
adjustment item for AMT.
The interest on the rest of the loan is LOST - not deductible at all,
anywhere!
Be very, VERY careful about using mortgage debt for anything other than
acquiring your property.
Good luck,
Gene E. Utterback, EA, RFC