Mortgage Interest

[skhyatt]

Reading through the Tax Book this morning, wanted to make sure I have this right. If TP refinances their home, say three or four times in a year to get a better interest rate, this would be acquisition debt limited up to 1 million. If the new principal balance exceeds the original mortgage in any of the refinances, then that would fall under the home equity debt rules and could be limited either to 100,000 or fmv less remaining principal balance? This seems like it could get confusing if as I said, the TP refinanced three or four times during a year. Hope I explained that correctly. Your thoughts/feedback?

[jainen]

not exactly

>>If the new principal balance exceeds the original mortgage in any of the refinances<<

It is not exactly "the original mortgage," but the remaining balance of the original mortgage. When the purchase loan or any subsequent refinance has paid down the principal, you can never restore acquisition debt (although you can add to it with capital improvements).

I draw up a list or spreadsheet for the mortgage history. It's important to note the payoff amount at every refinance. If a refinance has both acquisition debt and home equity debt, future payments on principal are allocated to the equity debt to preserve the higher limits of the acquisition debt.

[skhyatt]

Easy example

Had a prospective client ask me about this today, seems like a simple one, but want to make sure I'm thinking in the right direction. TP refinanced original home. This was Grandfathered debt I believe. Balance prior to refinance was $6000. New loan totaled $40,000, which included amounts rolled in from loan fees, etc. The proceeds from the loan were used to purchase a new car, so this is equity debt. Loan is under 100,000 so it should be fully deductible. FMV of the home is around $300,000, less $6000 = $294,000, well above the $100,000, so I would use the 100,000 as the limit. Am I going in the right direction?

[skhyatt]

By the way

When figuring the FMV less acquisition debt, it is the current debt amount and not the original debt amount, yes?

[veritas]

Had a prospective client ask me about this today, seems like a simple one, but want to make sure I'm thinking in the right direction. TP refinanced original home. This was Grandfathered debt I believe. Balance prior to refinance was $6000. New loan totaled $40,000, which included amounts rolled in from loan fees, etc. The proceeds from the loan were used to purchase a new car, so this is equity debt. Loan is under 100,000 so it should be fully deductible. FMV of the home is around $300,000, less $6000 = $294,000, well above the $100,000, so I would use the 100,000 as the limit. Am I going in the right direction?

You have 6k in original aquisition debt (assuming it had not been refinanced before) and 34k in equity debt. It's all deductible interest. If the taxpayer had paid off the mortgage completely he could borrow up to 100k as equity debt and all the interest would be deductible for regular tax.

[skhyatt]

You have 6k in original aquisition debt (assuming it had not been refinanced before) and 34k in equity debt. It's all deductible interest. If the taxpayer had paid off the mortgage completely he could borrow up to 100k as equity debt and all the interest would be deductible for regular tax.

Even though the original debt had not been paid off, in this situation, can't TP still borrow up to 100K?

[veritas]

The taxpayer

can borrow up to 106k. 6k original aquisition debt and 100k equity debt.

[skhyatt]

Gotcha, thanks much.

[S T]

Thanks for posting

Skhyatt,

Thanks for an additional post on the mortgage interest limitation. It is becoming more difficult so am reading all I can to try to apply the rules.

Your post helps to understand another portion of these convoluted rules and regulations.

Sandy

[skhyatt]

Thank you

Sandy, thanks to you also for your posts. This stuff is not as straightforward as one would think. Very informative info.

[S T]

More on this

So taking this one step further, beyond the acquistion debt and possibly beyond the equity debt.

t/p is on the 2nd refi and has pulled out $$. Some of which have gone to home improvements, but a lot went to pay off personal debt and auto loans.

So you use the interest paid divided by interest rate method, rather than average balance method to arrive at what might be deductible mortgage interest?

Still a little confused when do you use just the Average balance method?


Sandy

[skhyatt]

Pub. 936

It's still confusing, but did you see part 2 of Pub. 936, where it talks about the average mortgage balance?

[Kram BergGold]

A few things

Interest on debt in excess of home aquistion debt is deductible for regular tax purposes up to the $100,000 of debt. But for AMT this is not deductible.
I use average mortgage method in all years. However in the year the debt is paid off I use the amount of outstanding debt just before the payoff rather than zero. This may not be an approved method but I get the right answer.

[S T]

Simplicity

Everyone is taking a much more simplistic approach to this I guess. Or I am just making it more complicated.

I can't seem to make the rules and regulations work for some of the t/p. There is always something that seems to be different and not enough examples in the Pub 936.

I am afraid this one is going to come back and "haunt" us.

Sandy