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How Can I Deduct my Home Equity Line of Credit?

Loans that are secured by your main home or a second home qualify for the home mortgage interest deduction. Mortgages include a mortgage to buy your home, a second mortgage, a line of credit or a home equity loan.

Well, the IRS has some limitations on the amount you can deduct, and it depends on several factors such as the date of the mortgage, the amount of the mortgage and how you use the proceeds.

The IRS has three categories of mortgages that qualify for a tax deduction:

Grandfathered debt: This has nothing to do with your grandfather, or your grandmother for that matter, but really refers to all mortgages that were taken out before Oct. 13, 1987.

Home acquisition debt: This category includes mortgages taken out after Oct. 13, 1987, that were used to buy, build or improve your home. Throughout the year, these mortgages, plus the "grandfathered debt" mortgage, must total $1 million or less for them to qualify as a deduction. However, if you are married filing separately, the limit is $500,000.

Home equity debt: This category includes mortgages taken out after Oct. 13, 1987, that were not used to buy, build or improve your home. But these mortgages qualify only if throughout the year they totaled $100,000 or less ($50,000 or less if married filing separately). Additionally, they must not have totaled more than the fair market value of your home, reduced by "grandfathered debt" and "home acquisition debt."

The good news is that if your mortgage interest meets these criteria, then it is deductible. If it does not, then there is a work sheet in Part II of IRS Publication 936 that can be used to calculate your deduction.

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