Equity Home Loans

Combining 2 home equity loans - how to claim on taxes.?

I am considering combining 2 home equity loans. At the moment I can claim the interest paid on 1 of the loans as it was for home renovation, but not the other. I rent my house out, and need to know if I will still be able to claim interest for my taxes on the $ used for original home renovation. We are in the military and stationed in Japan. We rent our house out in FL. I took out a home equity loan when we first moved into our FL house, and because it was for renovations, I am able to claim this under the rental expenses. The 2nd home equity loan was taken out to consolidate debt, as it is easier to make one payment while in Japan. We have equity in our house still. The reason I want to consolidate is because we are going to be stationed in Virginia, and as we do not want to sell our FL house and do not like throwing money away for rent we are going to try and buy a 2nd house. If I consolidate these 2 loans it would free up an extra $400 a month to qualify for another mortgage.

Public Comments

1. Which property will secure the loan? HELOs are deductible (on Schedule A) on a principal or second residence if the amount of the proceeds are used for renovations, repairs or improvements, subject to the normal combined $1,000,000 loan limit. You may also deduct proceeds used for other purposes, up to$100,000 over and above the amount used for renovations, repairs or improvements, subject to the same $1,000,000 loan limit. Loans secured by investment property are deductible (on Schedule E) for the purchase of the property or the improvement, renovatiom, repair, or maintenance of the property. To be deductible the interest expese must be a reasonable and necessary expense for the production of income. If you use the proceeds of a HELO secured by a rental property to buy a car for personal use, that's not a business expense and would not be deductible. If you secure the HELO with the rental property, limit the proceeds to the rental property improvements, etc. If you secure it with your personal residence you'll have some wiggle room.
2. Hmmm...my question is why can't you claim the other loan interest? Did it exceed the FMV (fair market value). I do know there are times when you can't claim the interest on a mortgage. But, they aren't very common. Generally, this would mean that you owe more on the house than it is worth...and someone gave you a loan for that amount...and you didn't spend it on the house. Which loan was first...the one that you can't deduct or the one you spent on renovation? It seems to me that this was mishandled to begin with. And, your question here even makes it apparent. Without knowing the answers to my questions I can't give you any advice. Sorry I couldn't help.