How much HELOC interest can I deduct?

Accountant says limit is $100K, others disagree

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Add Comment Add Comment | Comments: 0 | Posted Nov. 13, 2012

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Accountant says limit is $100K, others disagree

Benny Kass
Inman News®

DEAR BENNY: This question is related to our home equity line of credit (HELOC). In 2001, we obtained this loan for $150,000, which we withdrew in its entirety to remodel the kitchen, bath, etc. This is an adjustable 25-year loan. As of 2011, we owe $122,000.

Our tax accountant just informed us that we should bring the loan down to $100,000 because we are not able to deduct the interest over $100,000. She has been deducting the interest since 2001, but told us this is a new rule that started in 2007. She also suggested we should pay off the loan and invest the money.

This is the only deductible interest, aside from church and charity donations, that we have. Our home is worth approximately $950,000. We have read IRS Publication 936 and are confused. Are we limited to interest deductible on the HELOC loan for only $100,000? --Al

DEAR AL: I suggest that you get a second opinion from another tax accountant. I am not familiar with any law involving this issue that was enacted back in 2007. The applicable law was passed back in 1987.

IRS publication 936, entitled "Home Mortgage Interest Deduction," is relatively helpful but still confusing.

We start with a concept called "acquisition indebtedness." This is the amount of your original mortgage loan. Let's take this example: You bought your home for $100,000 and obtained a loan for $90,000. The $90,000 is "acquisition indebtedness." You can deduct mortgage interest on loans for your principal residence and any second home up to a maximum of $1 million.

But there is one additional amount of a loan on which you can deduct, and that is called "home equity debt." Typically, that is used in connection with a HELOC loan. Here the limitation is limited to the lower of (1) $100,000 or (2) the amount that the fair market value of your home exceeds the home acquisition debt.

The IRS clearly understood this to be confusing. So it gave an example. The fair market value of your house is now $110,000, and your acquisition debt is down to $95,000. The HELOC lender gives you a loan of $42,000. However, since you are limited by No. 2 above, you can deduct only an additional $15,000 ($110,000 minus $95,000) on your tax return.

But, I question your accountant's opinion. You state that you used all of the proceeds from your HELOC to make improvements to your main (principal) home. If that's the case, it is my understanding that the amount you used for improvements increases your "acquisition indebtedness." In that case, until your loan amount reaches the $1 million mark, you can deduct all of the mortgage interest (assuming no other limitations such as the alternative minimum tax (AMT)).

Ask your tax accountant about this, and as suggested, perhaps you should get a second opinion.

DEAR BENNY: We bought a property at a lakeside community. Our property has deeded access to a lakeside community park, which is for use of the local property owners. There are number of floating docks that people have placed there for their use to dock boats easily and/or picnic. Several of them are in dangerously dilapidated condition and appear abandoned. The ones that are nice have signs saying "No Trespassing."

I have two questions. Do I or the collective owners have the legal ability to remove the abandoned docks and, if so, at whose cost (in other words, can we bill the original owners)? Secondly, do owners have the right to put their floating docks there and then restrict access from the other owners? There are so many, it is almost difficult, not to mention dangerous, to even get to the water, plus it interferes with what would otherwise be a nice view. Please advise. --Gerard

DEAR GERARD: I don't know the answer, and suspect that it may be found in the legal documents creating your lakeside community. You state that you bought into such a community; typically, there are covenants that spell out the rights and responsibilities of each property owner, as well as the role of your board of directors.

If you have a board of directors, this is a question for that board. The board should retain local legal counsel to assist in providing answers to your question. On the other hand, if there are no legal documents and/or no board of directors, then your local county officials may be of assistance.

As to your question about whether you can restrict access to a floating dock adjacent to your property, again, that answer may be found in the deed you received when you bought the property.

Alternatively, I suggest that you and several other concerned owners pool resources and retain your own local attorney to assist you.

DEAR BENNY: I read one of your recent columns in which a townhome dweller was upset with the recreational vehicle (RV) parking next to him taking up four guest spaces.

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