Mortgage Debt

[skhyatt]

Here's a question for ya. TP buys a new home. Purchase price, $150K. TP refinances, with a new mortgage of $200K. 150K is acquisition debt and $50K is equity debt. TP refinances again, with new mortgage of $250K. As I read it, the acquisition debt is still $150K???? I know this topic has been discussed before, but never really seen this exact subject addressed.

[solomon]

Here's a question for ya. TP buys a new home. Purchase price, $150K. TP refinances, with a new mortgage of $200K. 150K is acquisition debt and $50K is equity debt. TP refinances again, with new mortgage of $250K. As I read it, the acquisition debt is still $150K???? I know this topic has been discussed before, but never really seen this exact subject addressed.

150K acquisition debt unless TP used some of the equity debt for improvements.

[skhyatt]

So the $150K original purchase price is the acquisition debt through the life of the loan, regardless of how many times they might refinance, unless as you pointed out, some of or all of the proceeds on a refinance are used to improve the home.

Thanks for your reply.

[solomon]

So the $150K original purchase price is the acquisition debt through the life of the loan, regardless of how many times they might refinance, unless as you pointed out, some of or all of the proceeds on a refinance are used to improve the home.

Thanks for your reply.

Well, without improvements the acquisition debt would never be more than 150K. However, as I recall, the acquisition debt decreases as the debt is reduced. Consequently, on a refinance only the acquisition debt immediately prior to the refinance is acquisition debt and any additional debt would be home equity debt.

[Kram BergGold]

acquisition debt

Acquisition debt is not $150k. It is whatever the mortgage debt was at the time of the first refi. After that you only reduce acquistion debt when all equity debt has been paid off.
So $150k mortgage. Made payments for 2 years and paid off $2,000 of principal. Acquisition debt now $148k.
Borrowed $50k and then $25k. So total debt equals $223,000. Acquisition debt stays at $148 until taxpayer pays the $223k down to under $148k.

[les grans]

Kram says...

"Acquisition debt stays at $148 until taxpayer pays the $223k down to under $148k."

A most astute observation, Mark. Well done; have a Happy Deductible New Year.

[SunTaxMan]

"Acquisition Debt" evaluated

As I read this thread, it seems that the depth of truth is finally sinking in - something that sometimes takes time.

Let me "paraphrase" and ask for further "evaluation."

Whenever a tp comes in with "refinance" activity, I need to see ALL prior:

1. financing (original) and re-financing

2. Home Equity loans.

3. If any "cash out" occurred in any of these situations, I need to track how those funds were used - to determine how much, if any, of the mortgage interest

I. qualifies as:

A. "Home Mortgage Interest" for Schedule A,

B. Potential of business use interest for Schedule C

C. "Personal" interest, normally not deductible, or

II. does NOT qualify as "qualified" home mortgage interest, because of

A. $ level limitations, or

B. FMV limitations.

C. It is better, or more appropriately used, as something OTHER than Home Mortgage Interest.

With all of this in mind, it would seem wise to:

A. Keep an ongoing file for each client of these activities (so I don't have to "start from scratch" when a refinance occurs.).

B. Develop an Excel file to input basic purchase information and subsequent refinance information, so the calculations are less "tedious."

Next issue - I have not investigated ATX (my current tax program) or any other to see if this process is already dealt with in the software. Comments?

[les grans]

And then there's investment interest expense on Schedule A, and rental property expense on Schedule E, too, and does the client maybe have a farm...? Maybe client used the "cash out" to buy exempt bonds...

Wow I never thought about trying to organize something like this... It's a bottomless swamp of overlapping rules and distant horizons. I'm not known for my cogent metaphors.