I've got a tax question.

Due to a divorce, my son was forced to take a home equity loan to get the money to pay his ex-wife for her share of the house. He's now doing his taxes and asked me if the interest in this equity loan is deductible. He thinks it should be, but I told him it probably isn't because it wasn't $$ used to improve or repair the home.

Anybody know what the real answer is?

is tax deductible. Is your son aware that the standard deduction is much higher this year? I went through all my usual deductions (and I've got a bunch) but find that my H and I are eligible for a $10,000 standard deduction. I wish I had known before I spent hours and hours organizing my receipts.

all of that, I'm sure. He also has all the RE taxes, child support, and interest on the original home mortgage, medical expenses (had to get the kid braces this year), so I suspect he could go over the standard deduction.

are deductible only the part that exceeds 7.5% of AGI. But the tax software will calculate it.

are often treated differently -- falling into, as you noted, lines which merely put your home at risk in a forclosure, and those used to improve the residence.

In this particular case, depending on how the loan and payment to the ex was structured, it will change how the loan is treated.

If he went down to the bank, took out the loan and deposited the proceeds in his checking account, then wrote a check out to ex (or any other similar situation), then he needs to get an accountant to look at the actual loan documents.

If he purchased his wife's interest in the house using a home equity line -- and all proceeds went directly to wife w/o him having control, then it is treated the same as him having bought a 1/2 interest in the house (fully deductible). To effect that, there should be a contract with the ex, or court documents, that require him to pay the wife for 1/2 the value of the house, then valuing the house at $X, and an equity line payment directly to ex of $X/2 made directly to wife from bank or escrow company, as well as a corresponding change in title.

I listened to some radio show who had a tax attorney on giving advise and he mentioned that if you took out an equity line to buy a car or pay off your credit cards, that was NOT deductible.

I just wanted to give the kid good advise! Thanks for your help.

if your debt exceeds the value of the house, and you use it for other than home improvement or home purchase, then there may be restrictions. on the other hand, if he can clearly tie the home equity loan to payments to his ex for PURCHASE of her share of the house, then i think he's ok regardless.

of course there also a $1,000,000 cap on mortgage interest, but i'm guessing that doesn't apply.

(i'm have no tax license, take it for what it's worth)

any good tax software will tell him. It's only a home equity loan if they have a deed on the house though....

I think Ronald Reagan's cancelling the deduction for non-mortgage interest (the biggest tax increase in history) was more of a gift to the mortgage industry than it was anything else. Before Reagan did this, the most logical reason to take out a second was to roll it into your real property as improvements. (Also if you needed a shitload of money you couldn't get any other way.) Now that the only kind of deductible interest is on loans secured by real property, people are taking out seconds to buy houses and boats and to pay down credit card bills.

I wouldn't put it past Shrub to make second mortgages non-deductible, but right now they are.

Yes, in theory, the interest is deductible when the loan is used for home improvement. In reality, this is the last place where people can deduct the interest, so people have been using the money to take trips, buy cars, etc.

Some real estate professionals claim that if your house is paid free and clear you are not financially savvy...

So yes, he can deduct the interest. Every one does it.

Now, there are some limits, like if it is more than $100K, I think.

http://www.irs.gov/taxtopics/tc505.html

Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home, but only if these mortgages totaled $100,000 or less throughout 2005, and all mortgages on the home totaled no more than its fair market value. The limit is $50,000 if you are married filing separately.