Mortgage Interest more Complicated

[S T]

Oh dear, someone needs to rescue us as tax professionals from the convoluted rules on the mortgage interest deductions.

Just came across another one. Was primary residence, changed to a rental in 8/2005, but t/p refinanced and obtained down payment on another primary residence. So I limited her mortgage interest in 2005. Thought all was fine, and in looking at 2006 statement, the new loan, is a Negative Amortization loan, so the principal balance grew $14,185.

So now how do I figure the interest deduction, do you suppose I can use the same percentages that I did in 2005?? Or is there another complicated method to caluclate this?

Sandy

[jainen]

two averaging methods

>>do you suppose I can use the same percentages that I did in 2005??<<

You wouldn't use the same percentages anyway, because payments on the principal for mixed use loans are always allocated 100% to the non-deductible or personal balance. I'm sloppy and do it annually, but you are supposed to do it month-by-month or use one of two averaging methods.

[S T]

Help

Jainen,

Please throw the dog a bone or cookie Treat!

This is a rental for all of 2006. In 2005 refinanced for $455,384, of which $112,723 is allocated to personal (paying off bills and down payment on another personal residence) Now for 2006, with this Negative Amortization Loan, the balance is $469,568.

Mortgage interest paid on form 1098 is $17,887.

so question is does the increase in the principal balance now get allocated to personal as well and then calculate the interest??

I am so confused and of course the instructions didn't take into consideration the negative amortization that a good many of us will be facing over the next year or so!

Sandy

[jainen]

I don't see how

>>does the increase in the principal balance now get allocated to personal as well<<

I don't see how anyone could say the extra principal was used to acquire the property, so it must be considered as personal-use.

[JG EA]

That was what I was going to post also. The increase in principal would not change the percentages because no more money was taken out for another purpose.

[jainen]

change the percentages

>>The increase in principal would not change the percentages<<

Sure it would. Let's say the refinance was for $100,000, and $50,000 was the rental's acquisition debt so 50% of the interest is deductible. Now the principal grows to $101,000, but the rental is still allocated $50,000 and only 49% of the interest is deductible.