Mortgage Interest Limitation

[S T]

Just need confirmation.

Is it possible? Assuming my calculations are correct of course.

T/p had mortgages outstanding of $1.72 mil at beginning of year for first and 2nd home.
1st home was sold in 6/06 mortgages paid in full and then moved to 2nd home as primary residence. Ending mortgage balances as of 12/31/06 $740K

So if do the average balance method (all loans were either for acquistion or improvements)
average - $1,099,000 and then all mortgage interest is deductible.

Seems too good to be true?

Thanks,

Sandy

[JG EA]

Just need confirmation....

So if do the average balance method (all loans were either for acquistion or improvements)
average - $1,099,000 and then all mortgage interest is deductible.

Sandy

Sandy,
Looks good to me.
Pub 936:

Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)
2. Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)
3. Add amounts on lines 1 and 2
4. Divide the amount on line 3 by 2. Enter the result


Interest paid divided by interest rate method. You can use this method if at all times in 2006 the mortgage was secured by your qualified home and the interest was paid at least monthly.

There's a table there too.

The one thing that blew me away recently was that refinancing costs were not considered as part of the principal. (Sort of like the AMT calculation). But those costs if added to the new loan could be considered equity mortgage. This information was also there in Pub 936,

[S T]

Thank you

JG,

I don't know about you in Wa, but down here in So Calif, the T/P's are certainly presenting challenges with refi's and sells and buys. Seems like all I am doing is issuing "caution" notices to them.

Thank you for your vote of confidence and the references. I have always been unsure about the refi costs, so that is good news that we can add to the equity side.

Sandy

[jainen]

too good to be true

>>Seems too good to be true?<<

Yes, it is too good to be true. The taxpayer prepaid one loan completely, so he can't use the average balance method. Try it again with the interest paid method.

[S T]

When will I ever understand this



Jainen,

Thanks for always being around, even if sometimes we don't like your answers, but you do assist us in trying to find the right answer

Found it in Pub 936 - Okay I reworked this one more time, so used the Interest Paid divided by interest rate method to arrive at the average balance. So average balance arrived at was $1,297,888 So made a difference of approx $12,665 that can not be deducted.

Even after all these years, (but then we haven't had to deal with this mortgage interest limitation like we have had to the last year or two), I might finally be able to do these refinances and over limits in my sleep! Seems like 1 out 4 clients now have them!

Just continue to be here for all of us!

Thanks,

Sandy

[jainen]

deduct all the interest

>>we haven't had to deal with this mortgage interest limitation like we have had to the last year or two<<

Sandy, thanks for your kind words. A number of people have been saying nice things about me lately. It's taken six or eight months, but that pledge old Black Bart forced on me really works!

Now , about those big mortgages. Yes, it's hard to tell clients that they are too rich to deduct all their interest. But the real hard phase is just beginning. As property values drop, that equity debt won't be deductible because it exceeds the equity. Then we will have to tell our clients they are too poor to deduct all the interest!

[S T]

Another Question Same T/P

On this t/p he has 1st and 2nd home total mortgages Jan - June of $1,721,471 (trying to sell 1st home and already purchased 2nd home)

1st home sells 6/19/06 which relieves him of mortgage balance of $722,142 and he then pays off a line of credit on 2nd home of $247,070. So remaining mortgage balance as of 7/1/06 is $745,395 on the 2nd home which then becomes his primary residence.

My question is do I limit the mortgage interest for the entire year using the interest paid method, or am I only going to limit the first 6 months when he is over the $1.1 mil.

I have the figure for the full year using the interest paid method on all loans for 1st and 2nd home, keeping in mind that the 1st home is no longer in the picture as of 6/06, but I did the interest paid average calculation.

If I am only limiting for the 1st 6 months, how do I arrive at those calculations. I have not found any examples for this scenario.

I am trying to arrive at the best calculations obviously for the t/p but also make sure that the IRS requirements are met.

Can anyone lend some assistance.

Thanks

Sandy

[S T]

To get this to top

Jainen or someone

Can you help on this one! See the bottom post.

Thanks,

Sandy

[jainen]

month-by-month

>>do I limit the mortgage interest for the entire year using the interest paid method, or am I only going to limit the first 6 months<<

Either way. The interest paid method is an average over the whole year which will automatically adjust for the change in June. It's supposed to make it easier, but if you like you can always use actual month-by-month.

[S T]

Thanks

Thanks Jainen,

Can't use month to month as I don't have the monthly statements, so used the Average.

I was hoping that it adjusted,but just wasn't sure.

I have had an awful week of these mortgage interest limitations, and I see it getting worse on California returns. Every t/p situation is different, so having so many second guesses on how to apply the rules in Pub 936. Someone could have sure made it easier somehow.

Are you by chance using an excel spreedsheet for tracking loans and refinances on your clients? If so, would you be willing to share?

Seems like now is the appropriate time to be issuing "caution notices" to t/p's on cashing in on phantom equity. The only parties that seem to be ahead are the loan brokers and the mortgage companies.

Thanks for being here for all of us!

Sandy

[jainen]

I never use computers

>>using an excel spreedsheet<<

No, no, NO! I write it out in pencil, on a yellow legal pad so I can easily find the page next year.

As I have stated repeatedly on this site, I don't use computers. They are evil. My son uses them and every year he gives me his old one and tries to set me up, but I won't ever surrender.

I'm not opposed to electronics as such. I'm listening to Cousin' Al's Blugrass Show on KPIG right now. But I never use computers.

[S T]

So

So curious minds want to know!
Do you not use computer software to prepare your tax returns??
How do you do your research?
You do not surf the internet?

Sandy

[veritas]

Jimmy Chicken pants?

.............

[jainen]

Umm, well,

Do you not use computer software to prepare your tax returns??
How do you do your research?
You do not surf the internet?

Umm, well, I can see how you might have questions like that. It comes from relying on computers so much -- you can't think for yerself no more.

[S T]

Something does not add up here

Yes Veritas to your post, Jimmy Chicken Pants,

Yes I can think for myself, but sometimes trying to develop a worksheet or tool is difficult.

C'mon Jainen, you are still doing tax returns by hand? You haven't joined the age of technology and are not using computers at all or only for some purposes, just not other purposes.

Honestly tell us , you just don't want to share your "work of art"!

I think I am thinking more, and sometimes over thinking, even with the computer and the software programs, as I just don't always see how a number is placed on a certain line. Took me an hour today to research a line item and why it was that number. I had to go read about it and then manually calculate. I finally arrived at the same number the software had calculated, but that is not always the case. And worksheets to arrive at what we are suppose to place on the software line, has been a huge help in understanding and thinking about an issue.

So thanks to those people that have been thinking and have developed a worksheet! In trying to understand some of the rules and regulations it is difficult at best without a worksheet, and the IRS certainly does not provide the best ones.

Sandy