Unlock Your Home Equity with Figure
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- Borrow $20K-$400K
- Consolidate debt or finance home projects
- Fastest way to turn home equity into cash
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For aspiring entrepreneurs, finding the capital to launch a startup can be a daunting task. While venture capital and angel investors are common funding sources, many small business owners are turning to an often-overlooked asset—home equity.
Using the value in your home to fund your business may seem like a savvy move, especially when traditional loans are out of reach. But this strategy comes with legal and tax complexities that must be understood before moving forward.
In this guide, we’ll walk you through the essentials of funding your startup with home equity, including legal frameworks, tax consequences, and best practices.
What Is Home Equity?
Home equity is the difference between your home’s market value and what you owe on your mortgage. For example, if your home is worth $400,000 and you owe $250,000, your equity is $150,000.
You can tap into this equity in several ways:
- Home Equity Loan: A lump-sum loan with fixed payments.
- Home Equity Line of Credit (HELOC): A revolving credit line similar to a credit card.
- Cash-Out Refinance: Replace your current mortgage with a new one for more than you owe, taking the difference in cash.
Legal Considerations
1. Secured Loan Obligations
Using home equity means you’re placing your home as collateral. If your business fails, you could lose your home. Understand the terms of the agreement, including default clauses and interest rates.
2. State-Specific Homestead Laws
Each state has different protections for homeowners. Some states have homestead exemptions that protect a certain amount of your home’s value from creditors—but these may not apply if you voluntarily use your home as collateral.
3. Business Structure Implications
If you’re operating as a sole proprietor, there’s no legal separation between you and your business. That means personal assets—including your home—are fully exposed. Forming an LLC or corporation can help limit liability.
Tax Considerations
1. Deductibility of Interest
The IRS only allows home equity interest deductions if the loan is used to buy, build, or improve the home. If you’re using the funds for your business, you likely cannot deduct the interest on your personal tax return.
However, if properly structured, you may be able to deduct the interest as a business expense on your business tax filings.
2. Capital Gains Tax Risk
If you eventually sell your home and the IRS deems that you used part of it for business purposes, you might lose part of your capital gains exclusion. This could mean higher taxes on the sale of your home.
3. Documentation Requirements
Maintain meticulous records showing how the home equity funds were used for business purposes. This will be crucial for tax filing and potential audits.
Benefits and Risks of Using Home Equity for a Startup
Benefits:
- Lower interest rates than business loans or credit cards
- Quick access to capital
- No need to give up equity ownership in your company
Risks:
- Puts your personal home at financial risk
- No protection if the startup fails
- Complex tax and legal consequences if not structured correctly
Alternatives to Consider
Before deciding to tap into home equity, explore other options:
- SBA Microloans
- Crowdfunding platforms
- Business grants
- Personal savings
- Friends and family investments
CTA: Compare funding strategies in our guide: 10 Smart Ways to Fund Your Small Business
FAQs
Is it legal to use home equity to fund a business?
Yes, but you must comply with lending laws and ensure that the loan is disclosed as being used for business purposes if required.
Can I deduct home equity loan interest for my startup?
Typically, not on your personal tax return. However, it may be deductible as a business expense—check with a tax professional.
What happens if my startup fails?
You’re still responsible for repaying the loan. If you default, the lender could initiate foreclosure proceedings on your home.
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Final Thoughts
Using home equity to fund a startup is a powerful—but risky—financing strategy. By understanding the legal and tax implications, setting up the proper business structure, and consulting with experts, you can reduce risks and launch your business on a solid foundation.
Unlock Your Home Equity with Figure
- Approval in 5 minutes. Funding in as few as 5 days
- Borrow $20K-$400K
- Consolidate debt or finance home projects
- Fastest way to turn home equity into cash
- 100% online application
Our advice is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
