Mortgage Interest Limitation

[captnamo]

This may be more "venting" than a question......

Anyone every try to go through Pub.936 for a client that has had four refinancings since the original mortgage in 1984, didn't save any paper work, now owes $199,000 on a house $163,000 home with a basis, including an addition, of $88,000 and can't remember how much (if any) of the home equity interest was used to improve the home??? Arrrrrg!

I don't see a reasonable way to compute the average balances for the mixed use mortgage than make some assumptions and roll forward. Anyone ever had this area audited? Anyone else struggle with this kind of client? If so, what did you do?

Dropping back 5 yards to punt.......or.....I could send them to H&R Block?

--Steve

[S T]

Interest Tracing Rules

These rules are cumbersome, and I think most of us try our best to abide by them, but these rules probably need to be updated as well. We will probably see more tracing, since the values of the real estate are higher than they have been in a long while (particularly on the West Coast).

do the best you can, do you have CFS Tax Tools, they have a module in their software for interest allocation and it carries forward each year. I have used it for several of my clients.

Sandy

[jainen]

additional tax deduction

I've been running into this a lot for several years. I start by asking the client for the mortgage history. You'd be surprised how much they remember--dates, payoff amounts, etc. In your case I would guess not more than $88,000 acquisition, plus $100,000 equity, and don't worry about going a little bit over. Tell the client (and document in your file) that next time he refinances he will not get an additional tax deduction.

[veritas]

If he has borrowed more than the fair market value, the portion that exceeds the fmv is never deductible.

[captnamo]

Thanks....

....I just needed some sympathy!

No I don't get CFS, yet. Thanks for the tip.

I guess most of my clients know better than to refi their house for 125% of FMV and, you're right, after doing taxes for so many years, the price of a decent home has gone up quite a bit, even in western Michigan.

--Steve

[veritas]

I wish our tax software would track qualifying interest, equity and so on. I think I'll send Lacerete another email.

[captnamo]

Thanks....

....ahhhh (sigh of longing) for the good old days when all you had to do was input the mortgage interest off the 1098!

Part of the problem with this client is the lack of memory and paperwork...and although I explain the concepts of what I'm trying to get at, he just doesn't (and isn't like to ever) understand....and that makes the job a little harder.

I appreciate all your posts!

--Steve

[Snaggletooth]

Brilliant Tax Planning

Ah, yes, it's Captain Nemo again with another good post.

The amazing thing about all of this is that these people congratulate themselves for being so brilliant by putting all their loans into second mortgages and the like so they can deduct the interest. Part of our job (I would think) is to temper tax planning with economic reality.

Last week I had an Alabama couple in their late fifties consolidate his bills into a single mortgage. They now owe $140,000 on a house with a basis of $90,000 including improvements. (for those of you not living in the southeast, please understand this is a pretty decent home in the area they live) Their nest egg? I dunno - they showed $9 interest from their checking account at the credit union.

He told me he took all the credit card interest and auto loan interest and home mortgage and consolidated it into a single mortgage. "Ron, that means I can deduct all the interest and I thought it was time to be smart about my tax deductions."

This guy was celebrating his 58th birthday the following day.

Geez...

[S T]

Good Idea about our Software

Great Idea, we have to track so much now, I am running out of desktop space on my computer for all the software!!!!

Do you suppose we will ever get to the point of Paper Reduction and Tax Simplification! So far all that it has done is create more paperwork and more tracking!

Sandy

[veritas]

Sure like it when they give us simplification. The govt has changed the meaning of the word. Kinda like when they talk about cutting spending.