Mortgages over a million

[TaxRunner]

Does anyone have a client with a mortgage over a million. I am aware that you are only allowed to deduct interest on mortages up to a million. Any interest related to amounts over a million cannot be deducted on Schedule A. I was wondering if anyone else delt with this issue and if there are any loopholes to deducting more of the interest.

[jainen]

The million dollar limit

The million dollar limit only applies to mortgages used to purchase a primary residence. For cash-out refinances on the home or home equity lines of credit, an additional $100,000 of debt is allowed. For all other mortgages, normal tracing rules apply so interest may be deductible if the loan proceeds are used for a deductible purpose such as investment.

[TaxRunner]

Thanks

Thanks for the response. I did not mention that yes this is a primary residency, so I guess the limit is 1MM unless they take out a Home Equity Loan for an additional $100K. Is that correct.

[Joe Btfsplk]

Mortgage Amount

Should the tax preparer ask the client for the amount of their mortgage? For clients with smaller mortgages and smaller interest rates it would appear to be obvious, but large interest deductions would imply large mortgages.

What would prompt you to ask for the amount of the acquisition debt?

If you didn't ask, maybe it was over a million, maybe not.
Don't ask, don't tell?

[jainen]

Great slogan

>>Don't ask, don't tell<<

Great slogan for a tax shop! I think I'll put it on my business cards.

[TaxRunner]

I hope these are jokes. You definitely need to ask the client the amount of their debt, espeicially if it is questionable to you. If you do not and they get audit you could be on the hook as there preparer. This goes for anything that seem odd or fishy on a clients return. As a preparer you should be probing this questions.

[Black Bart]

Jokes 'n' audits

I hope these are jokes. You definitely need to ask the client the amount of their debt, espeicially if it is questionable to you. If you do not and they get audit you could be on the hook as there preparer. This goes for anything that seem odd or fishy on a clients return. As a preparer you should be probing this questions.

Generally speaking, I try to handle most of the jokes around here, but anyway I assume you're referring to those last two posts by Joe and jainen. If so, I think we can all agree that jainen's is a joke, but I'm not quite sure about that last part of Joe's (what was it? Kiss and tell?). Maybe he'll clue you in.

Anyway I/we are mostly aware that we're responsible for lotsa stuff if we "get audit." However, outside of a few wages-only returns, I can hardly think of a client who doesn't have at least something on his/her return that looks odd and/or fishy to me; to say nothing of how it would strike a revenue agent. Nevertheless, even though untold, I'm going to keep hacking at this biz and pray that my unasked clients are searching for their inner Billy Graham.

[Bees Knees]

Sometimes it is obvious, when you have a wealthy client with mortgage interest way out of proportion to the rest of your clients. I had a client once like that. I only asked because it seemed obvious.

[Joe Btfsplk]

Don't ask don't tell

You never know. I've had clients with some pretty fishy looking stuff who got audited by the IRS and came out smelling like a rose.

Normally, I suppose a $ 60,000 mortgage interest rate would imply debt of a million bucks.
But a guy could get a million dollar mortgage and pay half of it off a few months later and only have $30,000 interest--which would imply he only had a $500,000 in acquisition debt--unless he got one of those 2.5% mortgages like the offers I get all the time in the spam folder of my email.

[jainen]

I ALWAYS ask

>>You never know<<

I ALWAYS ask every client if the mortgage is the original one from when they first bought their home, or if they have ever refinanced. There is no other way to know. I update a worksheet every year on their mortgage history. If there is a refinance, I use the payoff amount from the settlement statement to track the remaining acquisition debt.

At least where I live, it is extremely common for home equity debt to go way past the $100,000 limit.

[Joe Btfsplk]

Always ask?

>>You never know<<

I ALWAYS ask every client if the mortgage is the original one from when they first bought their home, or if they have ever refinanced. There is no other way to know. I update a worksheet every year on their mortgage history. If there is a refinance, I use the payoff amount from the settlement statement to track the remaining acquisition debt.

At least where I live, it is extremely common for home equity debt to go way past the $100,000 limit.

If the debt is that much, you need to ask. Where I live most houses sell for between $ 300,000 and $500,000 so I don't have any reason to suspect million dollar mortgages. I only have one client who has a million dollar mortgage..

[jainen]

Client inherits a house

Client inherits a house worth $500,000. They are beseiged by mortgage brokers who explain how they can invest the equity, so they get a new mortgage for $300,000 which they use to buy a little rental. The monthly payment is low because it's an owner-occupied rate, so the tenants cover it and everything is fine -- except only 1/3 of their mortgage interest is deductible.

[outwest]

You lost me here..

on why only 1/3 is deductable. I would use the tracing rules to take the interest to the Sch E for a 100% deduction.

Doug

[jainen]

weekend at Disneyland

>>use the tracing rules to take the interest to the Sch E for a 100% deduction<<

Phooey. You may have noticed that I posted at 10:40 last night. Even though that's Central Time and I'm on the coast, it's way out of my safety zone (a.k.a. bedtime).

So instead let's say they spent the $300,000 on a weekend at Disneyland.

[Joe Btfsplk]

Weekend at Disneyland

So instead let's say they spent the $300,000 on a weekend at Disneyland.

If they spent $ 300,000 on a weekend they must have gone to Las Vegas instead of Disneyland