Certain Interest for AMT

[Snaggletooth]

Reading from TTB addresses "excess" interest when proceeds of a home refinancing exceed the amount usable for buying or improving the home.

Wish I understood this better. Does this "home refinancing" include a second mortgage? Is the "excess" calculated ratably over the loan period?

Indulge me if you will, as I can understand better using real numbers.

Bubba and Tanktop bought a home for $130,000 and have their mortgage paid down to $100,000. They refinance their home for $110,000 and use the extra $10,000 to buy Bubba the Pickup Truck of his dreams. Which is true?
a) Interest on the extra $10,000 becomes an AMT adjustment because it was more than what was used to payoff the house loan.
b) Interest on the extra $10,000 is NOT an AMT adjustment because the refinanced amount of $110,000 is less than the $130,000 cost of home.

Sorry to do another but bear with me please -- I'm having trouble grasping this...
Pete makes a $100,000 loan, of which $10,000 is considered "excess" for AMT purposes. The "Excess" interest is calculated under which of the following methods?
c) 10% of all interest on this loan is "excess" (10K/100K) for the duration of the loan.
d) ALL interest on this loan is "excess" until it is paid down to $90,000, after which NONE of it will be "excess".

Nothing like revealing your ignorance to fellow preparers. Humbling at times...

[Nashville]

Thundering Response

Snag thanks the group for the overwhelming response to this post.

But quite understandable given the subject matter and awkward phraseology. Also, there have been a slurry of posts this year that ask questions with obvious answers or which appear to ask the readers to provide answers that can be had with the least minimal bit of research. I trust this one does not fall into the above-mentioned categories.

My take:
Question 1:
If Bubba has $130,000 in the home in cost and improvements, then there is AMT interest only on any loan which raises the total debt above $130,000. In the example given, Bubba has no AMT interest. Strictly reading from the definition in TTB.

Question 2: Any AMT interest is calculated prorata as the offending debt is retired along with the principle. Thus 10% of interest this particular loan would float over into the AMT for as long as the debt exists. Taxpayer can get rid of the problem at any time if he wishes to make a new loan for less than the prescribed limits of cost and improvements. Most taxpayers are not willing to do this until such time as their debt has been whittled down such that the new loan pays off an amount less than the prescribed limits.

[Kram BergGold]

Totally disagree

The acquisition debt is 100k and home equity is 10k. The interest on the 10k is subject to AMT.
for this calculation, every year the principal payments first reduce the home equity debt. So in a few years when the debt gets back down to 100k, the AMT adjustment will go away.

[Snaggletooth]

Thanks - Tough Post

Thanks for responding Kram. Don't know that I agree with you or disagree either.

Would like to hear from others but this is tough subject matter. Maybe "tough" isn't quire the word and "unwieldy" might be better.

I wish they would do away with AMT in its entirety. This is one area where expertise causes clients to have increased taxes instead of lowering them.

[joanmcq]

I interpret that as cash out, not used to buy or improve the home, is not deductible for AMT.

So in example 1, the answer is A. Not deductible for AMT.

Example 2 is B.

[mactoolsix]

Bubba and Tanktop bought a home for $130,000 and have their mortgage paid down to $100,000. They refinance their home for $110,000 and use the extra $10,000 to buy Bubba the Pickup Truck of his dreams. Which is true?
a) Interest on the extra $10,000 becomes an AMT adjustment because it was more than what was used to payoff the house loan.
b) Interest on the extra $10,000 is NOT an AMT adjustment because the refinanced amount of $110,000 is less than the $130,000 cost of home.

Sorry to do another but bear with me please -- I'm having trouble grasping this...
Pete makes a $100,000 loan, of which $10,000 is considered "excess" for AMT purposes. The "Excess" interest is calculated under which of the following methods?
c) 10% of all interest on this loan is "excess" (10K/100K) for the duration of the loan.
d) ALL interest on this loan is "excess" until it is paid down to $90,000, after which NONE of it will be "excess".

.

For question #1 a) you only allocate the balance of the acquisition debt ((100,000) thus the rest (10,000) is equity debt.

for #2 Pete borrows $100,000 - if secured by his primary residence, the entire 100,000 could be equity debt - no matter the use.
or Pete borrows $110,000 - if secured by his primary residence, $100,000 is equity and the other 10,000 might be allocated to a Sch. C bus or other investment
or Pete borrows $100,000 - 90,000 is acquisition debt, the other 10,000 is equity debt
In each of the above, the equity debt is subject to AMT, if the 10,000 balance is not allocated to a business etc, it is non-deductible personal interest.
In each you allocate the interest and deduct equity debt Sch. A and subject to AMT, Sch. C on Sch. C, and personal is non-deductible.

On another note:
If you take out a $550,000 loan to cover $500,000 acquisition debt, and $50,000 for a Sch. C business, the 50,000 is automatically allocated to Sch. C by the tracing rules, and no election is necessary. In fact if you filed an election, it would allocate the entire loan, thus you would loose the acquisition debt deduction.

If you take out a $150,000 equity loan (no acquisition debt) you have several allocation decisions:
1.) Elect to allocate the entire loan to Sch. C - - - If only 125,000 is for Sch. C, then the other 25,000 is non-deductible
2.) Allocate $100,000 to equity debt, the $50,000 can be allocated (without election) to a Sch. C using the tracing rules
3.) If you want to use part of the loan for Sch. C, and part for personal use, you are better off taking out two separate loans. Elect to allocate the entire amount of one to Sch. C, the other will be equity debt.
Again, any equity debt will be subject to AMT

Here are two good links that explain this much better than I can:

http://www.fogelcpa.com/Documents/CSEA-Fogel-IntHomeEquityDebt.pdf

http://www.fogelcpa.com/Documents/CSEA-Fogel-IntHomeEquityDebt.pdf

Hope that helps,
Mike

[Snaggletooth]

WOW - can get messy

Thanks McTool, actually added another dimension to the fray. From this I gather that if there is an "excess" on an equity loan, it becomes an AMT adjustment even if the proceeds are used for Sch C (E,F) and the interest deducted thereunto.

I did think the $100K ceiling was removed in the case of using the interest deduction on Sch C and we had a recent discussion about that.

Good reading on the link, too.

[Bees Knees]

Thanks McTool, actually added another dimension to the fray. From this I gather that if there is an "excess" on an equity loan, it becomes an AMT adjustment even if the proceeds are used for Sch C (E,F) and the interest deducted thereunto.

McTool never said that. Equity debt is only an AMT adjustment if it is NOT deductible on Schedule C, E, or F.

[Bees Knees]

If you look at page 2 of the 6251 instructions, you will note there is a worksheet to calculate how much of the home mortgage interest must be added back as an adjustment for AMT purposes. The first line of that worksheet takes the home mortgage interest deducted on Schedule A (Form 1040), lines 10 through 12, and then proceeds to make adjustments to those amounts to determine how much is an AMT adjustment for line 4 of the 6251.

If the starting point is interest deducted on Schedule A, then any interested deducted on Schedules C, E, or F would not be included in that amount.

[Snaggletooth]

Thanks to Everyone

The introduction of equity loan proceeds use for Sch C made the topic more difficult than was intended, but I'm glad it came up since borrowing for business use is often the reason for large equity loans.

I know more than I did. Thanks, Folks.