If I borrow $200K home equity line of credit to (partially) pay down
my mortgage. Can the interest on the line of credit fully deducted?
IRS website indicates if the loan is used other than build / improve
your home, you can only deduct interest on up to $100K.loan.
So I think the answer to my question above is yes. But can anybody
either confirm or reject it? Also, what document / evidence should I
keep to fence off IRS if it challenges me on my deduction?
If I keep the bank record which shows the exact amount (e.g. $200K)
being taken out from home equity account is transferred to the
mortgage account. Is it a good enough evidence to show the money is
indeed not used for other purpose?
Thanks. Are you referring to the point 3.6 on the IRS website? I
think my question, putting another way, is whether "paying down
mortgage" can be classified as "buy, build, or substantially improve
"My interest" wrote
Yes, I am looking at point 3.6. I suggest reading all of it.
For HELs, it refers the reader to
. Both of these note that there may be a limit to how much of the HEL's interest you may deduct. They explain the limit.
My impression is that it does not matter what you use the
HEL for. The bigger issue for you may be the limit I mention
Elle's link was good, that refers you then to pub 936. See page 8,
middle column, "refinanced home acquisition debt"
"Any secured debt you use to refinance home acquisition
debt is treated as home acquisition debt. However, the new debt will
qualify as home acquisition debt only up to the amount of the
balance of the old mortgage principal just before the refinancing. Any
additional debt not used to buy, build, or substantially improve a
qualified home is not home acquisition debt, but may
qualify as home equity debt (discussed later)."
I'm pretty certain this covers you. But to your point, keep a paper
trail. Very simple to show a mortgage balance of $200K one day, and the
other loan of $200K the next.
Well, I want to lower my cost but I don't think I am trying to be
sneaky. The bank is not really passing through the benefit of lower
interest rates to us as consumers. Given the 3% cut in FedFund rate,
how much % mortgage rate has been cut? (Well, banks will always give
you some "reasonable" technical explainations and I know what they
will say - I am working in the financial industry myself).
Actually I am not sure why you say it may violate the terms of my
credit line. When I applied the credit line, one question on the
application form was "do you intend to pay down / off your current
mortgage". To me, this implies paying down mortgage is one of the
possible/valid reasons to apply the credit line.
This is indeed the reason for my original question. I am using the
line of credit to pay down my mortgage (i.e not playing tricks to pay
for things like vacations etc). None of the IRS FAQ I found covers
exactly my case. I would guess the closet example is either a
refinance (can my case be treated as partially refinance by a line of
credit) or may be an acquisition cost (what IRS will think if I used
the line of credit to buy another house? If it has no problem with
that, why do you think it should bark if I use the money to "pay" for
my current house?)