New client had mortgage interest that doubled from last year, so in questioning the reason for the increase, I asked him if he refi'd in 2005 and if he had refi'd in previous years as well. His answer was he has refi'd many times since he purchased the home in 1990, but does not know how much he has taken out throughout the years. He has advised me that he purchased the home in 1990 for $180,000 and loan is now at $325,000. He can't seem to give me any other specific info. How would other preparers go about determining what his average acquisition debt would be on a home purchased in 1990. He is telling me he doesn't have all his refi papers? I know his equity debt is more than 100,000; thus limited. Taking the $180,000 from $325,000 leaves $145,000 towards equity, but that does not take into account the 15 years of payment on acquisition debt.
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peggysioux -
I would try to locate the original mortgage, well actually you have that number. Then I tried to find out if any money was used for home improvements and add that to the aquisition debt. All the rest should be equity debt, right. -
Acquisition portion
I know he purchased home for $180,000, but don't know how much of acquistion debt has been paid in the last 15 years reducing the acquistion portion of debt. Any ideas on how to determine when client says don't know where previous refi's are???
Thanks!peggysiouxComment
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If client doesn't have original papers, maybe he remembers loan terms and payment amount (escrow not included), then you could run an amortization schedule.
If he remembers name of company only, he could contact them.
If his memory is bad, it's bad for you too.
On the other hand if it is impossible to figure out now, how would the IRS ever be able to. In case of bad memory I would take full amount and educate client about possible problems down the road. You only can do your best with the info the client provides.
You can not suck blood out of a turnip.Comment
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The problem with taking the full amount is your negligent client (failed to retain the settlement statements) is rewarded by paying less tax than their similarly situated neighbor who exercised due diligence and retained the settlement statements from each of their refi’s. The best you can do with such a client is make an honest effort to compute their current home acquisition debt. Given the information you have provided it is obvious there will be some limitation on their mortgage interest deduction. If the client is unhappy when informed of that reality, you should cheerfully send them down the street to someone who doesn’t care about the quality or honesty of the returns they sign.Originally posted by Gabriele
This situation is similar to one of my pet peeves. The individual who utilizes a tax preparer who is ignorant of or could care less about mortgage interest limitations and alternative minimum adjustments, pays less tax than the individual who goes to a tax preparer who is actually interested in complying with the tax laws as they are written. Taxpayers shouldn’t be punished for going to a preparer who actually cares about preparing a quality return. This will continue to be one of the basic problems with our tax system as long as incompetent and/or dishonest preparers are allowed to remain in the business.
JeffComment
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Home Mortgage Interest - Tracing Rules
I have had this problem/issue for many years now. I tried several years ago to get the info from my clients - escrow papers on purchases, refi's, etc. Some like noted in these threads have acquisition debt that is very, very old and no documentation. I found: (1) the Code and Regs are extremely burdensome and complex [Not new, I know!]' (2) the clients asking "why all of a sudden are you asking for this data? [I try to explain to them and when they hear they might lose deductions they frown or worse!]; (3) the time involved to "recreate" all of the loans, payments and workpapers to come to a 'reasonable answer in line with the Code/Regs' was ENORMOUS! I mean hours and hours.Originally posted by Jeff
And, one cannot bill this out to the client - and retain them! If it were a topic that the research could be 'apportioned' to any client who had that issue, then maybe.
I have taken the approach of using percentages for acquisition debt and equity debt in relation to the total refi loan. Not exact but I do then allocate equity interest to AMT and if total interest exceeds acquisiton + $100k equity, I do not deduct that excess amount (%).
While not exact, I can do this in 15 minutes or so, charge the client a small fee to do this and I explain the whys and where-fores to the client to accept OR ask me to follow the Code/Regs [at which time I ask him for a retainer for the time it will take! - none have accepted the latter!]
Val
EA, MS (Taxation)Comment
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