Question

Which of the following statements regarding qualified home equity indebtedness is correct?

A. The limit on qualified home equity indebtedness depends on filing status.
B. Limits on qualified home equity indebtedness and qualified acquisition indebtedness do not apply to the same loan.
C. If the value of a home drops, the amount of qualified home equity indebtedness on an existing home equity loan also drops.
D. In order to deduct interest on home equity indebtedness, taxpayers must use the proceeds of a home equity loan to improve the home.

Answer 1

The correct statement regarding qualified home equity indebtedness is that limits on qualified home equity indebtedness and qualified acquisition indebtedness do not apply to the same loan.

Step-by-step explanation:

The correct statement regarding qualified home equity indebtedness is B. Limits on qualified home equity indebtedness and qualified acquisition indebtedness do not apply to the same loan.

Qualified home equity indebtedness refers to a loan that is secured by a taxpayer's main home or second home and that is used for non-acquisition purposes. On the other hand, qualified acquisition indebtedness refers to a loan that is used to buy, build, or substantially improve a taxpayer's main home or second home. These two types of indebtedness have separate and distinct limits for deducting interest on the loans.

For example, if a taxpayer has a home equity loan on their main home for $60,000 and a mortgage loan for $400,000 to purchase the same home, the interest on the first $750,000 of the combined loans may be deductible as mortgage interest. However, if the home equity loan was used for non-acquisition purposes, the interest on the amount exceeding the limits for qualified home equity indebtedness may not be deductible.