Question

25. Joe purchased a new home on March 1, 2023 for $375,000. He took out a home equity loan on January 2, 2024. The home equity loan proceeds were used to purchase a new car for his son. During the year, he paid $1,333 in interest on the home equity loan. This interest is deductible on his federal return but not deductible on his California return.

Answer 1

Because California disallows home‑equity interest that was not used to buy, build, or substantially improve the secured home, Joe must add back the $1,333 that he deducted federally.

How to report it
- On the California return (Form 540), enter the $1,333 as an addition for the state adjustment. Put it on Schedule CA (540) as an addition (Column C), identified as “Home equity loan interest — nondeductible (proceeds used to buy car).”
- Result: Joe’s California taxable income will be $1,333 higher than his federal amount, and his California tax will be computed on that increased taxable income.

Note: This only applies if he actually deducted the interest on his federal return. If he took the federal standard deduction instead, there would be no federal mortgage interest deduction to adjust.