Parents

"We used our home as a bank.  We paid each year's college costs with our home equity line of credit, and paid it back prior to the next year of college. Then we borrowed again, and kept doing that until both of our children graduated."
 
Those words were related to me in response to my answer to his question, "What do you do for a living?" 
 
Many families anticipate exploiting that same strategy.  Be careful!  We advise you to consult with your CPA or Tax Attorney first.
 
Have you read IRS Publication 936?  The relevant, basic information is quoted below (note the underlined sentence).
 
Refinanced home acquisition debt.   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt.
 
Home equity debt limit.   There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt . . .  is limited to the smaller of:
  • $100,000 ($50,000 if married filing separately), or
  • The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.
In the event of an IRS audit the penalties and interest on disallowed mortgage interest deductions may be significant.

The interest may qualify as an allowed deduction for education expenses.  Even there, however, please be certain the dollars were spent on qualifying expenses.  Alert your tax planning professional early as to your intentions so he or she has time to research the IRS regulations, and advise you prior to spending the money.

You can also take advantage of our help.  We regularly find money families like yours are transferring away to others unnecessarily or unknowingly.  In all cases it is a significant sum and, for some families, it is enough to cover the out-of-pocket costs of their child's college education.
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