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Are a home equity loan and a heloc both tax deductible?

Are both tax deductible if used for home improvements? I plan to pay off my mortgage and then take out a home equity loan for major improvements such as a new furnace, kitchen appliances, a new driveway, etc. Does this sound feasible?
  • October 14 2013 - Columbus
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Answers (6)

Profile picture for MitchCrawford
In totality, everyone's advice is very helpful to me. I will continue to scrimp and save and pay as I go. Your advice reinforces my current course to pay off the mortgage and work at least two more years after that before retirement. I can use those mortgage free years for improvements and upgrades. May God bless you all for helping me.
  • October 14 2013
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Profile picture for wetdawgs
IMHO, using a HELOC for simple purchases such as a gallon of paint would be a foolish use of a HELOC.    SoCal's point about whether or not the interest is deductible depending on your personal financial situation is very important.       In addition, when "interest is deductible", it doesn't mean you are getting a gift.  You are still paying interest but deducting some of the interest may or may not reduce your taxable income slightly. 

I'm a strong believer in pay as you go and not spending beyond your means.   If I need new windows, I scrimp and save and then get new windows.  

It used to be common to use one's home as a piggy bank.  Many people borrowed themselves into financial disaster using this approach as house prices plunged.  
  • October 14 2013
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Profile picture for SoCal Engr
"Would it make financial sense and is it legal to have a heloc and purchase every home improvement need such as a gallon of paint. Is it designed more for big ticket items such as new windows?"

No, it would not make sense to use a heloc to buy standard items like "a gallon of paint". A HELOC is a line-of-credit against the equity in your house, and is typically used for larger expenses which you do not have sufficient cash to fund directly. The advantage to a HELOC over a traditional home equity loan is that you only pay interest on the current amount of credit accessed.

If you can, you are still better off saving up and paying-as-you-go. However, for what you are talking about (i.e., larger purchases for home improvements), the HELOC can be a useful tool.

As far as taxes, you need to assess your personal situation. But, the interest on a HELOC may be reportable, but insufficient to actually work as a deduction. Depends on your income and other Schedule A deductions.
  • October 14 2013
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Profile picture for MitchCrawford
Would it make financial sense and is it legal to have a heloc and purchase every home improvement need such as a gallon of paint. Is it designed more for big ticket items such as new windows? Thanks for any advice.
  • October 14 2013
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Profile picture for wetdawgs
Here's a link to the irs website publication 936.     While the interest on a home equity loan may be tax deductible if used for home improvement, be very careful with your documentation on this one.    If you use part for a vacation and part for home improvement, then only a portion of the interest is tax deductible. 
  • October 14 2013
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Yes. Mortgage interest paid on you primary residence is considered tax deductible no matter of the type of lien or position. 
  • October 14 2013
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