The
Financial Benefits Behind Debt Consolidation
Written by ET Ibanez, CPA
It has always been a problem for homeowners
whether it is better to take an equity loan or keep a hand full of
non-deductible credit cards (unless primarily use for business) and
car loans. Interest on credit cards are mostly non-deductible because
the use are personal in nature. That goes for car loans too if such
is for personal use.
Is it better then to take an equity loan and payoff the credit cards
and car loan? The answer is "yes" most of the time.
A brief note on qualified residence is in order.
Qualified residence interest is defined as interest on loans that
are:
(a) secured by the taxpayer's first or second home, and
(b) within the dollar limitations on acquisition indebtedness and
home equity loans.
A taxpayer principal residence and one other residence of the taxpayer
and spouse is termed a qualified residence.
Subject to limitations, interest paid on a home mortgage would be
deductible. Qualified residence interest paid or accrued during the
tax year on aggregate acquisition indebtedness of $1,000,000 or less
($500,000 for married taxpayers filing separate returns) are fully
deductible.
Home equity loan interest are also qualified residence interest and
are also subject to limitations. The personal residence of the taxpayer
is use as security for the loan. Interest is only deductible on that
portion of the equity loan that does not exceed the lesser of:
(a) the fair market value of the residence less the acquisition indebtedness,
or
(b) $100,000 ($50,000 for married taxpayers filing separate returns).
Thus it seems that a non-deductible interest can be converted to deductible
interest by taking a home equity loan (subject, of course, to limitations).
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