Debt and the Income Tax Laws
The cost of credit increased with the passage of the Tax Reform Act of 1986, because since that time the interest paid on your auto, credit cards, education and other consumer loans is no longer deductible on your tax return.
In addition, there is only a certain amount of qualified residence (mortgage) interest that is deductible. Qualified residence interest is the interest paid or accrued on acquisition or home equity loans on respect to your principal residence and one other residence, usually your "vacation home." The total amount of acquisition loans is limited to $1 million and the total amount of home equity loans is limited to $100,000. Interest on any debt over these limits is considered to be personal, consumer interest that is not deductible.
Is it a good idea to take out a home equity loan? Should you convert your consumer loan interest into interest on a home equity loan in order to be able to deduct your interest? Before you join the rush to a home equity loan, you should consider the pluses and minuses.
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