Schedule A audits

[jainen]

Disclaimer: This is part of a series of posts that forum moderators have identified as containing “bogus information.”

A recent tax court decision held that falling real estate values did not constitute reasonable cause for underpayment of additional taxes due when the IRS denied mortgage interest deductions on a home equity loan because the FMV of the home had dropped below the original purchase price. According to the ruling, since the homeowner had no equity he obviously could not claim home equity interest—a prudent person would monitor neighborhood values and move to a cheaper home before getting “upside down” on his most valuable asset.

An IRS spokeswoman stated the agency plans to use this judgment to audit Schedule A taxpayers in communities where property values have gone down, and disallow mortgage interest deductions not supported by a contemporaneous appraisal.

[Snaggletooth]

Good Grief

When are these shell games going to stop?

The thing that makes Jainen's prepostorous posts "believable" is that there is always enough element of IRS idiocy that it can be believed. The old saying holds that a "half truth is more deceptive than a lie" because there is enough element that is true to deceive one into swallowing the whole thing.

Fortunate indeed that Brad has required a disclaimer. I guess if we don't like these posts we don't have to read them.

[jainen]

limited by FMV

>>Jainen's prepostorous posts<<

Okay, Snag, for now just skip the part about what the IRS might do. What are YOU going to do as real estate values adjust?

What will you tell a client whose refinanced property has dropped below their purchase price? Because it is a fact that qualified home equity interest is limited by FMV.

[jainen]

acquisition debt

>>Is this not similar to the home dropping below purchase price?<<

The FMV limitation applies to home equity loans (including cash-out refinance). It does not apply to acquisition debt.

[Snaggletooth]

Basis

Values in my area have not dropped in quite some time. There was a dip after 9/11 but the overwhelming number of homeowners still owned homes that exceeded their original purchase price, and the dip didn't last long. One of the reasons is that property values here are so much cheaper than the rest of the country.

In fact, Californians with middle-class homes have been selling out, taking the equity out of their homes, and building mansions in Tennessee with their money. They are living like royalty here with zero debt.

The biggest problem limiting mortgage interest deductibility is basis. Some of my biggest income customers are stupid in many ways because they continue to borrow against their home equity with 2nd and even 3rd mortgages.