Pay Cash For The House And Then Take Out A Homeequit

Q: - pay cash for the house and then take out a home-equity loan? - pay some cash and mortgage the rest in order to use the remaining cash toward renovations? use some other combination?

A: As this is a tax related group, I'll deal only with the tax issues. Obviously, the underlying economics are another issue entirely, which depends on the various terms being offered for each type of loan. From a tax perspective, if nothing more happens than you have described, then it makes no difference. The interest paid on either the mortgage you take out to acquire the house or the home equity loan you take out to improve it will be deductible. As the home equity loan is being used to improve the residence, it also appears likely it will be deductible for alternative minimum tax purposes and would also likely be deemed "acquisition indebtedness" for purposes of the limits on deductibility (so you could have up to $1 million in debt vs. $100,000 for home equity only). Now, if you were planning on taking on any other home equity debt and not using it to improve the home (say refinancing a car debt or something similarly not deductible like buying a car .

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