Mortgage interest continued

[S T]

Another one, I think I know what the answer is, but will post anyhow.

T/p owns primary home, no mortgage. Takes out $96,000 equity line to purchase vacant land. So far so good, under the $100K. Mortgage interest of $6,945 on this loan.

In 2006, takes an additional equity line for $200,000+ (separate new loan) to build new primary residence on the vacant land. Moves into new primary residence 1/31/07. Mortgage Interest $8,503.

So 2 equity loans against old primary residence, no loans on new primary residence.

So what is mortgage interest deduction??

Sandy

[Kram BergGold]

My take

I have researched this a bit and have concluded that he is limited to the interest on 100k and it is all subject to AMT. Acquisition debt is only, interest taken out on a home for that home.

[GIMoe]

Equity

...he is limited to the interest on 100k and it is all subject to AMT. Acquisition debt is only, interest taken out on a home for that home.

I agree. T/p would have been better off to take a construction loan to build new home, could have then converted to a regular mortgage and it would have all been deductible.

[jainen]

I'm not ready

>>Acquisition debt is only, interest taken out on a home for that home<<

I'm not ready to agree with this, although it was my own position in peggysioux's thread Wednesday morning. ibbwest quoted Pub 936 about how acquisition debt retains its category even when refinanced. It's even true that non-qualified debt could become qualified if it later secures the main home.

In other words, Sandy's client could add the new home as additional collateral to the loan with which it was built. From there it isn't too big a leap to say they could get a whole new loan, secured by the new home, and used to pay off the non-secured construction loan.

I wouldn't recommend that as a plan, but if that is what already happened I daresay I could bestir myself to defend it.

[S T]

Well

Jainen, thanks for your thoughts.

My thought (altho I am not clear on it yet) was to have them obtain a new loan on the newly constructed now primary residence for either the $200,000 or the combined $296,000. Since that home was just completed in 1/07, would it then become 100% acquistion debt??? The $296,000 would then pay off the two equity lines on the old primary residence, which now in 3/07 has been converted to a rental.

I have had my fair share of these mortgage interest deduction problems and tracing money all over the place and there just is not enough information or examples to be able to be confident in how they are to work.

So any assistance would be appreciated!

Thanks all for your thoughts!

Sandy

[JG EA]

Worksheet

Yes, after tax season I would love for someone to come up with a mortgage interest worksheet that covers all the rules. The other day I was reading that pestky pub and saw that repayments go first to equity loans in figuring the average balances. If I read very carefully with the particular situation in mind I can sort of grasp what they are saying , but then lose it after that situation is over. So, the next client is like starting over.

Today I had one that I really didn't get, but I think it is because I don't have enough information. Too tired right now, so I'm putting it on extension after I figure out what he'll approximately owe. AMT is why he'll owe and not just because of mortgages but they add to the balance due.