Home equity loan vs. store credit card. Which is better for my taxes?

September 17, 2014 by Dave Du Val, EA
House on top of stack of money

Hey Dave,

If I'm going to do home repairs, such as a roof and heating, which will cost about $15,000, would it be better to take out a home equity loan to pay for it or just use my Home Depot credit card, which has a big line of credit available on it?

Vinny

 

Vinny,

From a tax standpoint, if you borrow money to improve your home, and the loan is secured by the home (as it would be with an equity loan), then the debt is considered to be acquisition debt (regardless of the bank label “Home Equity”). The interest on home acquisition debt (up to $1,000,000 principal on the underlying loan) and home equity debt (up to $100,000, subject to limitations) is deductible if you itemize deductions.

On the other hand, if you borrowed the same amount of money from Home Depot, say on their credit card, the loan would be considered to be a personal loan because it is not secured by the home. Interest on personal loans such as this is not deductible.

Only you can compare loan origination costs, repayment terms, etc., to decide what is best for you in your circumstance; the added tax deduction is just one more consideration.

Deductibly Yours,

Dave

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Rhonda D. Guillory, EA
Learning and Development Manager

 

Rhonda was a Seasonal Tax Return Reviewer at TaxAudit before joining the permanent staff as an Audit Representative in 2009. She has a Bachelor of Science in Computer Science and worked in the Information Technology field for 15 years before making a career change. Since transitioning to the field of income tax in 2003, she has prepared and analyzed hundreds of tax returns. Rhonda enjoys helping taxpayers and tax professionals learn and understand the fascinating world of income taxes. Currently, she is the Learning and Development Manager.


 

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