"We find deductions others miss"

Tax Loopholes

Although Congress and the Internal Revenue Service have whittled away for decades at deemed "loopholes" in the tax law, many techniques still exist for minimizing tax liability.

Home Equity Lines of Credit

An individual should consider using home equity lines of credit or second mortgages to pay personal expenses such as credit card debt or to finance automobile, boat and other large purchases so that the interest may be deductible.

Interest on "qualified home equity debt", unlike personal interest, is deductible. I.R.C. [sec] 163(h)(1), (3)(A). To be "qualified home equity debt", the debt must be secured by a qualified residence of the taxpayer and not exceed the home's value. I.R.C. [sec] 163(h)(3)(C). A qualified residence includes the taxpayer's principal residence and one other residence, such as a vacation home used for more than 14 days or 10 percent of the time that the home is rented out, whichever is greater. I.R.C. [sec] 163(h)(4)(A)(i). Total home equity debt may not exceed $100,000 ($50,000 if married filing separately). I.R.C. [sec] 163(h)(3)(C).

Potential traps exist with home equity lines of credit. First, if a home equity loan exceeds the above limits, then the interest allocable to the excess debt will follow the "interest tracing rules." Under these rules, the deducibility of the interest allocable to the excess debt will depend upon the use of the proceeds - whether for personal expenditures, such as to pay off credit cards, or for investment purposes, such as to increase a stock portfolio, or for a business or passive activity. Second, an individual should be careful not to overextend and risk losing a home to the bank in a foreclosure proceeding.