Do you avoid tax when taking a home equity loan?
You'll be taxed when you sell the house, but not before that (or if you do some other transaction that realizes the gain, talk to your real estate attorney or accountant for more details). A Home Equity line-of-credit is simply a secured loan: it's a loan, conditioned on if you fail to pay it back, they have a lien on your house (and may be able to force you to sell it to pay the loan back). Loans are not taxable events. The equity you took out is not income. It's a loan, and you pay it back with interest. You pay taxes on the capital gain of the home when you sell it. The tax does not take into account any mortgages, HELOCs, or other loans secured by the house. Instead the tax is calculated based on the price you sold it for, minus the price you bought it for, which is known as the capital gain. You can exclude $250k of that gain for a single person, $500k for a married couple. (There are a few other wrikles as well.) That would be true regardless of the loan balance at the time. "(credits to Joe's answer above which alluded to what I was not considering) You aren't ""bypassing"" the tax liability if you invest in a home instead of, say, stocks. It's true stocks would be subject to tax during the year you cash in on them while the proceeds of a home equity loan would not affect your tax liability. HOWEVER, by taking on a new loan, you are liable for repayments. Those repayments would be made using your income from other sources, which IS taxable. So you can't avoid tax liability when financing your child's college education by using an equity line." Why would someone invest in other instruments (e.g. stocks) to pay for   childrens' college education when the capital gains on those are   taxed, unlike a home equity loan? Many tax advantageous vehicles exist for the purpose of saving for college education such as 529 plans, Roth IRAs, Series EE and I bonds. Tax and penalty free distributions from a portfolio of stocks is possible if the distributions are for qualified education expenses and the account is in the form of a Roth IRA.  A house is collateral for a home equity line of credit.  A combination of unfortunate events could cause someone to default on the loan and loose their residence. Also, the tax advantages of 529 plans, and Roth IRAs are not applicable to purchase a motor boat.  With respect, some people like to leave the home equity loan untapped for other uses. More Details: 529 plans are not taxed by on the Federal level when the withdraws are used for college.  In many states, contributions to state sponsored 529 plans are deductible on the state level.  These are not self directed so you can't trade stocks/bonds in a 529 plan, however, certain plans allow you to lock in the rate you pay for credit at today's prices. If you want a self directed (ability to trade stocks/bonds) vehicle with tax free disbursements for qualified education, consider a Roth IRA. There are yearly contribution limits, and penalty if the proceeds are not used for qualified educational expenses. Also I believe interest revenue from Series EE and I bonds is tax free if the bond is used for education. There are special conditions and situations to 529 plans, Roth IRAs, Series EE and I bonds, the purpose of this answer was to expand upon the tax advantageous vehicles for higher education.
You say that one property is 65% of the value of the two properties and the other is 35%.  But how much of that do the two of you actually own?  If you have co-signed mortgages on both properties, then your equity is going to be lower.  If you sold both properties, then your take away would be just half of that equity.  And while the 35% property may be less valuable, if you bought it first, it may actually have more equity.   It's the equity that matters here, not the value of the property.  With a mortgage, the bank is more of an owner than you are until you've paid down most of the loan.   You may find that the bank won't agree to a single-owner refinance.  A co-signed mortgage is a lot easier for them to collect, as they can hold either of you responsible for the entire loan.   If you sell the 65% property, then you can pay off any mortgage on that property and use the equity payout from that to buy out your relative on the 35% property.  If you currently have no mortgage, you'd even have cash back.  This is your fewest strings option.   Let's say that you have no mortgage now.  So this mortgage would be the only mortgage on the property.  It's not so much, as 15:65 is 3:13 or 18.75% of the value of the property.  That's more of a home equity loan than a mortgage.  You should be able to get a good rate.  It might reduce your short term profit, but it should be survivable if you have other income.   If you don't have other income, then seriously consider selling the 65% property and diversifying the payout into something else.  E.g. stocks and bonds.   Perhaps your relative would be willing to float you the loan.  That would save you bank fees and closing costs.  Write up a contract and agree to take assignment of the title at payoff.  You'll need to pay a lawyer to write up the contract (paying a modest amount now to cover the various future possibilities), but that should still be cheaper.   There's a certain amount of trust required on both sides, but this gives you some separation.  And of course it takes your relative out of the day-to-day management entirely.  Perhaps the steady flow of cash would provide what they need.   If your relative is willing to remain that involved, that can work.  Note that they may not want to do this, so don't get too attached to the idea.  Be prepared for a no.  This would be a great option for you, as you pretty much get everything you have now.  They get back the time meeting with you to make decisions, but they also give up control over those decisions.  Some people would not like that tradeoff.   The one time I was involved with a professional managing a property for me, the fee was around 7% of the rent.  If that fits your area, you might reasonably charge 5%.  That gives a discount for family and not being a professional.   There's a relatively easy way to find out what fits your area.  Look around and see what companies offer multiple listings.  Call until you find a couple that will do management for you.  Get quotes for managing your properties.  Now you'll know the amounts.   The big failing though is that this may not describe the issue that your relative has.  If the real problem is that the two of you have different approaches to property management, then making you the only decision maker may be the wrong direction.  This is certainly financially feasible, but it still may not be the right solution for your relationship.   If you get a no on this, I'd recommend moving on to other solutions immediately.  This may simply be too favorable to you. What kind of financial analysis would make you comfortable about this decision? The HELOC and ARM are the biggest red flags to me in your current situation.  While I don't expect interest rates to skyrocket in the near future, they introduce an interest rate risk that is easy to get rid of.  Getting rid of the HELOC and converting to a fixed mortgage would be my first priority. If you also want to upgrade to a new home at the same time (meaning buy a new home contingent on the sale of your first, paying off the HELOC and mortgage), that's fine, but make sure that you can comfortably afford the payment on a fixed-rate mortgage with at least 20% down. I would not take additional cash out of your equity just to save it.  You're going to pay more in interest that you're going to get in savings.   From there things get trickier.   While many people would keep the first property on a mortgage and rent it out, I am not willing to be a landlord for a part-time job, especially when the interest on the mortgage gouges my return on the rent.  PLus leverage increases the risks as well - all it takes is to go one or two months without rent and you can find yourself unable to make a mortgage payment, wrecking your credit and possibly risking foreclosure. So my options in order of precedence would be: At what point does it make sense to become a landlord? The complicated answer is when the benefits (rent, appreciation) relative to the costs (maintenance, interest, taxes, etc.) and risks (lost rent, bad renters, home value variance) give you a better return that you could find in investments of similar risk.  The simple answer is when you can pay cash for it.  That takes interest and lost rent out of the equation.   Again, some are willing to take those risks and pay 20% down on rental property.  Some are able to make it work.  Some of those go broke or lose their properties.   when calculating the 20% down of a new property, does that need to be liquid funds, or can that be based on the value of the home you are selling You can make the purchase of the new home contingent on the sale of the first if you need to get the equity out of it to make the 20%.  Do NOT refinance the first just to pull out the equity to make a down payment.  It's not worth the fees of a refinance. For cross-border transactions like this you should really take advice from an accountant or lawyer who specialises in them, because there may be tax treaties between the two that complicate the situation. However, in general borrowing money doesn't have tax implications in itself, and there's no limit as such. You do need to consider the following points: If this is zero or less than you could plausibly get commercially, your friend is effectively giving you the difference between the interest rates. If your friend in Korea has a connection to the US she or he may be subject to the gift tax. In practice this only matters if the total amount of gifts they give to anyone over their lifetime plus the size of their estate over their lifetime is large. Non US-persons are exempt though if the amounts are large enough they may need to be reported. Financial institutions are generally required to report large international transactions (typical thresholds are around $10,000) for scrutiny by the government, in case the transaction is related to something illegal. This shouldn't be a problem in itself but you should be aware it'll happen. It shouldn't make any difference how you transfer the money, but it would be wise to get as much documentation as possible in case of later questions. The best place to get further advice would be the US bank you'll be transferring the money into initially. This is really a question for a lawyer given the cross-border nature of the transaction, but you and your friend should sign a contract specifying how and when the loan will be repaid. Your friend should also consider setting up the loan as a mortgage and taking a charge on your home. Even if your friend trusts you, a charge on the home will protect him or her in the event of you having financial problems and another creditor laying claim to the home. A. Kindly avoid taking dollars in form of cash to india unless and until it is an emergency. Once the dollar value is in excess of $10,000, you need to declare the same with Indian customs at the destination. Even though it is not a cumbersome procedure, why unnecessarily undergo all sort of documentation and most importantly at all security checks, you will be asked questions on dollars and you need to keep answering.   Finally safety issue is always there during the journey.  B.There is no Tax on the amount you declare. You can bring in any amount. All you need is to declare the same.  C. It is always better to do a wire transfer.  D. Any transfer in excess of $14,000 from US, will atract gift tax as per IRS guidelines. You need to declare the same while filing your Income Tax in US and pay the gift tax accordingly.  E. Once your fiance receives the money , any amount in excess of Rs 50,000 would be treated as individual income and he has to show the same under Income from other sources while filing the taxes. Taxes will be as per the slab he falls under.  F.Only for blood relatives , this limit of 50,000 does not apply.  G. Reg the Loan option, suggest do not opt for the same. Incase you want to go ahead, then pl ensure that you fully comply with IRS rules on Loans made to a foreign person from a US citizen or resident. The person lending the money must report the interest payment as income on his or her yearly tax return provided the loan has interest element. No deduction is allowed if the proceeds are used for personal or non-business purposes.In the case of no-interest loans, most people believe there is no taxable income because no interest is paid.  The IRS views this seriously and the tax rules are astonishingly complex  when it comes to no-interest loans.  Even though no interest is paid to the lender, the IRS will treat the transaction as if the borrower paid interest at the applicable federal rate to the lender and the lender subsequently gifted the interest back to the borrower.The lender is taxed on the imaginary interest income and, depending on the amount, may also be liable for gift tax on the imaginary payment made back to the borrower. Hope the above claryfies your query. Since this involves taxation suggest you take an opinion from a Tax attorney and also ask your fiance to consult a Charted Accountant on the same. Regards A Home Equity Line Of Credit (HELOC) is simply a special type of secured credit. Secured credit is credit provided to you, where the lender has some rights to an associated asset in the event that you default. In the case of a HELOC, much like a mortgage, if you default on the payment terms, the bank may be legally able to foreclose on your house, sell the foreclosed property, and take the money owed to it from the proceeds, leaving you with any net remainder. Whether your friend will be able to have a bank offer her credit secured against her business assets would depend on a variety of factors. She should talk to her bank to see whether it would be possible in her case. "http://www.investopedia.com/articles/mortgages-real-estate/08/tax-deductible-mortgage-canada.asp  &gt; This strategy is not for everyone. Borrowing against your home is psychologically difficult, and if the investments don't yield expected returns, this strategy could yield negative results. By re-borrowing the equity in your home, you are also removing your ""cushion"" of safety if the real estate (or investment) markets take a turn for the worse. By creating an income-producing portfolio in an unregistered account, there can also be additional tax consequences - so always consult with a professional financial advisor to determine whether this strategy is for you, and if it is, have it tailor-made to you and your family's personal financial situation." Am I eligible for the tax exemption if yes then under which section.  Generally Personal loans are not eligible for tax exemption. Only housing loans from qualified institutions are eligible for tax deduction. As per the income tax act; The house should be in your name. The home loans taken from recognised institutions are fully qualified under section 24B and 80C. This means you can claim Interest exemption under 24B and Principal repayment under 80C. The Act also specifies that loan can be taken from friends/relatives for construction of property and will be eligible for Interest exemption under 24B only. The principal will not be eligible for exemption under 80C. Read the FAQ from Income Tax India. There has to be certificate showing how much interest was paid on the said loan. Further there should be records/receipts on how the money was spent. There is difference of opinion amongst CA. It is best you take a professional advise. "So, let's take a mortgage loan that allows prepayment without penalty. Say I have a 30 year mortgage and I have paid it for 15 years. By the 16th year almost all the interest on the 30 year loan has been paid to the bank This is incorrect thinking.  On a 30 year loan, at year 15 about 2/3's of the total interest to be paid has been paid, and the principal is about 1/3 lower than the original loan amount.  You may want to play with some amortization calculators that are freely available to see this in action.   If you were to pay off the balance, at that point, you would avoid paying the remaining 1/3 of interest.   Consider a 100K 30 year mortgage at 4.5% In month two the payment breaks down with $132 going to principal, and $374 going to interest.  If, in month one, you had an extra $132 and directed it to principal, you would save $374 in interest.  That is a great ROI and why it is wonderful to get out of debt as soon as possible.   The trouble with this is of course, is that most people can barely afford the mortgage payment when it is new so lets look at the same situation in year 15. Here, $271 would go to principal, and $235 to interest.  So you would have to come up with more money to save less interest.  It is still a great ROI, but less dramatic.   If you understand the ""magic"" of compounding interest, then you can understand loans.  It is just compounding interest in reverse.  It works against you."