Use home equity loan to buy a small business?

[leahjade]

If so will the interest be tax deductible?

 

[j's m]

Yes, we did a home equity loan to refinance a business loan at 3% less.

From Publication 334 Business expenses:

Interest

You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. Interest relates to your business if you use the proceeds of the loan for a business expense. It does not matter what type of property secures the loan. You can deduct interest on a debt only if you meet all of the following requirements.

You are legally liable for that debt.
Both you and the lender intend that the debt be repaid.

You and the lender have a true debtor-creditor relationship

 

[daughtersrus]

If so will the interest be tax deductible?

As a business expense possible but not as a mortgage deduction on your personal return.

I'm not sure that I'd be willing to put my house up as collateral for a business. A friend did that and not only did he loose the business when it failed, he also lost his house.

 

[mommyrosa2]

As a business expense possible but not as a mortgage deduction on your personal return.

I'm not sure that I'd be willing to put my house up as collateral for a business. A friend did that and not only did he loose the business when it failed, he also lost his house.

I have to agree here...I know 2 people who did this and both lost everything. I have family who work in financing and mortgages and both agree that a home should never be "tied" into a business, it's too much of a risk. I would look into a small business loan.

 

[Cheshire Figment]

I would also suggest going to www.irs.gov and order the following publications which will probably help a lot.

334 - Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)
463 - Travel, Entertainment, Gift, and Car Expenses
535 - Business Expenses
551 - Basis of Assets
552 - Recordkeeping for Individuals
560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
583 - Starting a Business and Keeping Records
587 - Business Use of Your Home
946 - How to Depreciate Property

And also, if the time can be spared and at and minimal cost take a first semester Principles of Accounting course at a local Community College. Not necessarily to keep the books, but to get an understanding of what the business is doing.

Note that most small business fail within the first few years not because the owner did not know his subject but because they did not understand the accounting.

Mike (CPA Retired)

 

[stacie_d]

As an attorney, I would never tie my house to a business.

Edited: in terms of a home equity loan.

 

[wdwmom0f3]

As an attorney, I would never tie my house to a business.

Edited: in terms of a home equity loan.

I have to agree. I would not advise anyone to do this because it's just to risky.

 

[mpls_mm]

We have a small business and we would never, ever risk our house. If your business plan can't sway a bank or micro fund or any other number of sources to lend you , don't risk your house.

 

[North of Mouse]

NO WAY, not in this economy, and probably for us we'd never do it at anytime, because we wouldn't want our home tied to ANYTHING.

 

[Colleen27]

I'm not sure that I'd be willing to put my house up as collateral for a business. A friend did that and not only did he loose the business when it failed, he also lost his house.

This, exactly. We have a couple of friends who pulled equity out of their homes to start/expand their businesses and both lost their homes when the housing mess sent the construction industry off a cliff. It made me very, very glad my DH & I were in total agreement about "settling" for staying small/growing slowly rather than taking on debt to expand. We had a few lean years but at least our home wasn't on the line.

 

[seashoreCM]

If a business has a loss in its first year or two, the loss can reduce other taxable income (such as from dividends or wages) even if the business expenses leading to the loss included a lot of interest and even if the loan was not secured by your home. The interest on the loan(s) used to start or continue the business is described on the business part of the tax return (schedule C). In most of these calculations the word "deduct" is not used.

If a business is hopeless, you are supposed to go out of (the) business. Insisting on keeping it going despite loss after loss year after year can result in the IRS' treating it as a hobby and after a few years the loss cannot reduce other income. An exception can be made if the business does not "look like" a hobby (such as photography, or raising or racing horses) and it is run in a businesslike fashion and projections for the future indicate profitability.

 

[bumbershoot]

I'm not sure that I'd be willing to put my house up as collateral for a business. A friend did that and not only did he loose the business when it failed, he also lost his house.

I agree completely.

Having had a business that failed inside of 5 years, I would STRONGLY urge ANYONE who wants to start a business to NOT take a loan. If you don't have 5 years worth of ALL expenses saved up, don't start the business. And I mean ALL expenses. Rent and/or mortgage on business AND home, food expenses, advertising, etc. Everything. Otherwise, don't do it.

So just hold your horses, get your savings in gear (and yes, it will take awhile), and later on start your business and watch it have a much better chance at succeeding. You'll still probably close inside of 5 years (harsh, but it's the reality of small business), but at least you won't be as broke as you would be as if you couldn't pay the loan and they took your house as well as all your other money.

 

[englishteacha]

A family friend lost their house in the 1990s because they remortgaged their home to help the family business. I certainly wouldn't do it.

 

[Evi]

I wouldn't recomend doing this. I know someone who did this and now is barely making ends meet. They are constantly struggling to pay bills and it has caused them great marital and family strain. As an outsider I couldn't even begin to imagine the level of stress this has caused them.