Home Equity & Taxes: A Must-Read Before You Borrow

What Are the Tax Implications of Accessing Home Equity?

Need cash? Your home might be sitting on a goldmine! It’s like having a built-in piggy bank you can tap into when needed. This “piggy bank” is your home equity – the difference between your home’s current market value and what you still owe on your mortgage. As you pay down your mortgage and/or your home value increases, your equity grows.

But before you start planning that dream vacation or paying off those student loans with your home equity, let’s talk taxes. Understanding the tax implications can save you money and stress down the line.

Ways to Access Your Home Equity

Here are the most common ways to access your home equity:

• HELOC (Home Equity Line of Credit): It’s like a credit card secured by your home, allowing you to borrow against your equity as needed.
• Cash-out refinance: This involves replacing your existing mortgage with a new, larger one, giving you cash at closing. Think of it like upgrading your phone and getting cash back in the process!
• Home equity loan: This is a second mortgage with a fixed interest rate and a lump-sum payment.

Now for the good stuff – the tax benefits!

Tax Benefits of Accessing Home Equity

Unlocking Tax Perks with Home Equity Loans and HELOCs

The mortgage interest deduction allows you to deduct the interest you pay on your mortgage from your taxable income. And guess what? The interest you pay on a home equity loan or HELOC is often tax-deductible too, especially if you use the money for home improvements! Imagine finally creating that chef’s kitchen you’ve always dreamed of, or that luxurious bathroom oasis! These upgrades not only increase your home’s value but could also lead to tax savings. Just remember that there are limits on how much interest you can deduct, so it’s always a good idea to chat with a tax pro for personalized advice.

Cash-Out Refinancing: Tax Facts You Need to Know

When you do a cash-out refinance, the interest on your new, larger mortgage is usually tax-deductible, just like your original mortgage. However, the interest on the portion of the loan that represents the cash-out amount might have some limitations, especially if you don’t use it for home improvements. Again, it’s best to consult a tax advisor for specific guidance.

Important Tax Considerations

• If you sell your home shortly after accessing equity, you might have to pay capital gains taxes on the profit.
• Keep good records of how you use the funds from your home equity loan or HELOC. This will come in handy at tax time.
• To make the smartest decisions, team up with both a tax professional and an experienced mortgage broker (like me!). I can help you navigate the different options and find the best solution for your needs.

Ready to unlock your home’s potential? Let’s chat! Schedule a free consultation with Chenine Lozano today.

Chenine Lozano, Real Estate Finance Expert W: (562) 620-7662 C: 562-762-7511 NMLS #1655101 DRE#02069548 Endeavor Mortgage NMLS#355050