Home Mortgage or home equity line or loan?

[dyne]

I consider that exchanging a home mortgage for a home equity line or loan or HELOC
is generally a Very BAD idea! A client did this very thing against my advice.
Such loans usually have a variable interest rate which can go UP!

As I understand such loans only the interest paid upon the first $100,000 borrowed is
deductible. The cost of the home can be grandfathered in and added to the $100,000.
But if the home mortgage is paid down to $20,000 for example only THAT amount can
be added to the $100,000. Therefore only a pro rata portion of the interest paid can
be deducted.

Home mortgages are generally non-recourse meaning that the house is the only
collateral and the home owner can not be sued for any unpaid balance owed on the
loan. With the economic problems of today and due to changes in the banking industry
I believe that home mortgages now can be recourse loans therefore holding the home
owner liable for the unpaid balance due on the mortgage.

For non-recourse loans or mortgages any amounts of the loan unpaid is NOT taxable
to the home owner. Since home equity lines or loans or HELOCs are recourse loans
any amount of these loans forgiven by the bank or lender IS TAXABLE to the former
home owner and will be reported on form 1099-A or 1099-C, etc.

On top of all that a portion of interest paid on these loans are an ADDBACK to
AMT and to be reported on line 4 of the form 6251.

I would appreciate comments to correct me if I am wrong. Thank you.

[taxea]

I haven't had the need to research this but it sounds like a reverse mortgage rather than an equity loan.

[S T]

Dyne

Koss or Bees can probably explain better than I can, but agreeing with your post, it is a "very" bad idea to exchange an acquisition mortagage for an equity line of credit. I think you have "nailed down" most of the pitfalls. I am hoping I dont receive many of these in for 2009 tax year and I really hope I don't receive any for 2010 or 20111 tax years. But my fear is that "they are looming" and it will be a "huge" challenge for us as tax preparers.

Sandy

[dyne]

No, my post did NOT apply to a reverse mortgage!
Although debatable, a reverse mortgage in my opinion is only
a possibly good idea when a taxpayer is in dire need of income.
My daughter deals in reverse mortgages and advised that the heirs
are often disappointed when a reverse mortgage is involved. Apparently
these heirs would rather have their parents go without food, etc. so that
they could obtain more funds from the sale of the house inherited from their parents.

[Gretel]

I wonder if having a LOC for the purchase of a home is really considered LOC for tax purposes. I have a client that bought a home and the bank didn't want to do the mortgage any other way. So he has an acquisition LOC for $300,000.

I bet it's because of the recourse thing since he has lots of other things going on. I my mind this is still an acquisition mortgage. It would have been different had he decided to purchase the home first and then take out a LOC.

What you think?