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Year-end tax strategy: Turn a ‘tax lemon’ into lemonade

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Unfortunately, you’re generally not entitled to any tax benefit for interest paid on personal debts. (There is a limited exception for student loans.) But you can deduct the full amount of interest paid on up to $1 million of “acquisition debt” used to buy, build or improve your principal residence. 

In addition, you can deduct the interest paid on up to $100,000 of home equity debt (including a home equity line of credit). It doesn’t matter how the proceeds are used.

Strategy: Convert a personal debt into a home equity debt. That way, you can deduct the interest on the home equity debt, even if you use the funds personally.

Example: If you’re borrowing funds to buy a new car for your child, you can write off the interest if you use a home equity loan instead of a traditional bank loan. 

However, a home equity debt must be secured by your home, so use this year-end technique judiciously.

Tip: The same rules apply to a second home such as a vacation home.

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