A home equity loan is a type of loan in which money is borrowed from a financial institution using your property as collateral. These types of loans are used especially to pay for major expenses such as buying a car. The good news is that because major purchases like these are great for the economy, the government allows the interest on these types of loans to be tax deductible, rewarding you in a small way for helping boost the economy. You can make your new car tax deductible using a home equity loan by taking advantage of this special benefit.
How to make your new car tax deductible using a home equity loan
If the prospect of dealing with banks and car salesmen does not not excite you, then you are not alone. The positive note is that this process is a little different than you would expect and should turn out heavily in your favor.
Step 1: Speak to the bank about your loan details and amount. Before you get settled on a dream car, go to your bank or visit them online to determine how much you can borrow.
You’ll also want to find out how long it will take you to pay it back and what, if any, other restrictions there are regarding the loan. Don’t forget to ask about any hidden fees associated with the loan.
Step 2: Research the car. Doing your homework before buying a car makes a world of difference in your final satisfaction with the process.
Get a handful of options and narrow it down to just a couple. Once you have a particular make and model in mind, be sure to look up all the different options and features the car offers so you know before getting to the dealer exactly what you want.
Step 3: Purchase the car. Go to the dealer and get the buying process started once you have the home equity loan settled.
Since you will have a lump sum of cash to pay with, you should be able to get a significantly better price on the car you want. Since you are paying up front, the dealer will be able to give you a discount.
Don’t be afraid to negotiate the prices and visit other dealers as well. You can play the dealers against one another to get the lowest possible price.
Once you have the car at the price point you are satisfied with, make the purchase.
Step 4: Fill out the relevant tax forms during tax season. Making the car tax deductible finally requires you to fill out a Schedule A (Form 1040) on your taxes.
You should receive a form from the bank in the beginning of the year that has lots of information regarding your loan contained within it. This will help you fill out the Schedule A. The IRS also has an online instruction manual to help explain the form.
With this form filled out and submitted, any interest you paid on the home equity loan will be returned to you in the form of a deduction. This may be a smart financial move to consider, but make sure to evaluate your overall financial and personal situation beforehand. If you are planning to purchase a new car, then it is a great time to look into your car insurance rates to determine if you are overpaying.