Home equity loan vs. store credit card. Which is better for my taxes?

September, 17 2014 by Dave Du Val, EA

Hey Dave,

If I'm going to do home repairs, such as a roof and heating, which will cost about $15,000, would it be better to take out a home equity loan to pay for it or just use my Home Depot credit card, which has a big line of credit available on it?

Vinny

 

Vinny,

From a tax standpoint, if you borrow money to improve your home, and the loan is secured by the home (as it would be with an equity loan), then the debt is considered to be acquisition debt (regardless of the bank label “Home Equity”). The interest on home acquisition debt (up to $1,000,000 principal on the underlying loan) and home equity debt (up to $100,000, subject to limitations) is deductible if you itemize deductions.

On the other hand, if you borrowed the same amount of money from Home Depot, say on their credit card, the loan would be considered to be a personal loan because it is not secured by the home. Interest on personal loans such as this is not deductible.

Only you can compare loan origination costs, repayment terms, etc., to decide what is best for you in your circumstance; the added tax deduction is just one more consideration.

Deductibly Yours,

Dave