Carrying charges revisited

[JG EA]

Client is doing carrying charges on bare land for interest and taxes.

Client will be refinancing this land to get more money for a down payment on another piece of land (personal to build a home).

Can the interest be counted? Probably only the part that would have been allowed on the original purchase? So, tracing the interest? Would that still work as carrying charges?

[lsmith]

Carrying Charges

Interest on this raw land is added to basis. Interest on any refinance for whatever reason is still added back to basis.

[JG EA]

Sorry to bug

but, do you have a reference or a place I can start looking for one?

[jainen]

Interest is allocated

>>Interest on any refinance for whatever reason is still added back to basis.<<

Interest is allocated to whatever the loan proceeds were used for. That would be the new home in this case. It has nothing to do with acquiring, improving, or maintaining the lot.

[JG EA]

Thanks Jainen

So, if I ran an amortization to see what the original interest would have been would that be an acceptable way of tracing the interest to carry the part on the land purchase?

[jainen]

points can be deducted anywhere

>>if I ran an amortization to see what the original interest would have been<<

No, don't get too complicated. Just divide the points by 180 or 360 months (or whatever the term is) and take that amount times the number of months he had the loan during the tax year. Then allocate it to the appropriate activity.

Of course, in this case the activity is a personal residence. Since the loan is not secured by the home, it is not qualified home mortgage interest. Therefore neither the interest nor the points can be deducted anywhere.

[JG EA]

Thanks for your reply

The carrying charges are on the investment land. The new loan is for the new home. I realize that nothing there can be deducted (not secured).

Thanks for your help!

[jainen]

I didn't realize

Okay, I didn't realize that there is already a loan in place. The new loan will have to be treated as two loans. Determine the ratio of original balance to total refinance, and apply that percentage to the interest and points. Each year the ratio will change, because payments on principle are allocated to the non-deductible portion, thus preserving as much as possible for the investment carrying charges.

[lsmith]

Carrying charges

If you have a master tax guide, look up 'carrying charges' in the index.

[jerome]

The tax book page 4-11 says a home mortgage is any loan that is secured by the taxpayer’s main or second home as collateral for the loan…Debt not secured by the property is personal debt.

The interest tracing rules only apply to business debt and investment debt. If you want to count the interest as mortgage interest on a first or second home, it has to be secured by that property. You cannot use debt secured by raw land in a different location as mortgage debt on your first or second home. That would apply also to points paid on the loan as well.

[jerome]

The tax book on page 4-14 also talks about the election to capitalize interest and taxes on raw land. If you can't use the interest as mortgage interest on your main or second home, and it doesn't qualify as investment interest under the tracing rules, then you can elect to capitalize the interest and add it to the basis of the raw land.

[jainen]

something else instead

>>you can elect to capitalize the interest and add it to the basis of the raw land<<

No, you can't. You are misreading the reference. If the proceeds are traced to a non-deductible use, then you can't say, "I'll allocate them to something else instead."

[jerome]

>>you can elect to capitalize the interest and add it to the basis of the raw land<<

No, you can't. You are misreading the reference. If the proceeds are traced to a non-deductible use, then you can't say, "I'll allocate them to something else instead."

Sorry, my fault. I agree. You have to trace the interest to the land first before you can elect to capitalize it.