Sammy Gardner 972.668.1309 Sammy@SammyGardner.com TAX-WISE METHODS OF USING HOME EQUITY FINANCING Using the equity you have in your home to secure a loan may be a tax-wise method of financing or re-financing some of your personal and business expenditures. Here are a few home equity borrowing techniques that may save you tax dollars: Financing Personal Expenditures: The interest you pay on consumer purchases, such as personal loans, car loans, and credit card debt is not deductible for federal income-tax purposes. However, interest paid on a home equity loan of up to $100,000 secured by your personal residence generally qualifies as an itemized deduction, even if the loan proceeds are used to pay off your existing consumer loans or to purchase personal items. You should compare the effective after-tax interest rate on the home equity loan to the interest rate on the particular consumer loan you are considering to determine which deal is more favorable. To calculate a home equity loan’s effective after-tax interest rate, subtract your marginal income-tax rate from 100% and multiply the result times the home equity loan’s interest rate. For example, if your marginal income-tax rate is 28% and your can secure a 10% home equity loan rate, the effective after-tax interest rate of the loan will be only 7.2% (100% - 28% = 72%, 10% x 72% = 7.2%). Thus, if your consumer loan interest rate is higher than 7.2%, it may be beneficial to take the home equity loan. However, keep in mind that 1) there may be some costs in obtaining a home equity loan, and 2) if your adjusted gross income exceeds the allowable amount for 2005, your itemized deductions will be limited. Financing Business Expenses: Interest on business income is fully deductible against business income. A business owner who uses proceeds from a home equity loan for business purposes may elect to treat the loan as a business loan rather than a home equity loan. Making this election has several potential advantages: You don’t need to itemize to claim the business interest deduction. For self-employed individuals, reducing business income also reduces self- employment tax Transferring home equity debt to business debt in effect allows you to write off interest on more than the $100,000 maximum level of home equity indebtedness. Note: This is not an advertisement or solicitation of loans. The purpose of this article is to provide you with information that could impact your real estate or mortgage environment. H5 Financial, Inc. is a full service mortgage brokerage approved with several lending sources throughout Texas. H5 Financial, Inc. provides conventional, non-conforming and jumbo loans. We assist customers with great credit, bad credit and no credit. We also assist individuals who are self-employed and require both full documentation and no documentation loans. Sammy Gardner 972.668.1309 Sammy@SammyGardner.com Example: The only debts a business owner has on his/her principle residence are two home equity loans: debt A, with a principle balance of $90,000, whose proceeds were used to buy business equipment; and debt B, with a principle balance of $30,000, and whose proceeds were used to purchase a new car for personal purposes. The aggregate amount of both debts, $120,000, exceeds the $100,000 limit on the amount of allowable home equity indebtedness. However, if the business owner elects to treat debt A as not secured by a qualified residence, the interest on that debt will remain fully deductible as a business expense, and all of the interest on debt B will be deductible as home equity interest. While home equity loans can be an attractive source of financing from a tax viewpoint, there are risks involved with pledging your home as collateral. Before borrowing, consider your personal financial situation and your ability to repay the loan, as well as the outlook for property values in your area. The purpose of this newsletter is to stimulate thought for our clients and those professionals we work with. One should consult with a qualified tax planning professional prior to implementing any tax planning strategies. If you are a real estate, estate, mortgage or insurance planning professional receiving this newsletter, please call our office and introduce yourself to us. We are always seeking to grow our referral network and expose more service professionals to our client base. Note: This is not an advertisement or solicitation of loans. The purpose of this article is to provide you with information that could impact your real estate or mortgage environment. H5 Financial, Inc. is a full service mortgage brokerage approved with several lending sources throughout Texas. H5 Financial, Inc. provides conventional, non-conforming and jumbo loans. We assist customers with great credit, bad credit and no credit. We also assist individuals who are self-employed and require both full documentation and no documentation loans.