Help! I am a preparer in California and I have been taking a closer look at the limits on the Mortgage Interest Deduction for home acquisition debt and home equity debt. Is anybody familiar with Table 1, the average balance method and the mixed use mortgage method. How do you calculate these worksheets if the client refinanced many many times over the years and they don't remember how much they originally bought the house or the original loan, or they don't know the new loan amounts. I am running into several clients who in the past three or four years in California with the rising property values took a lot of cash out of their home to pay off credit card debit, tution, buy new cars, put money in savings or for other personal uses. Some of them are exceeding the home equity debit limit of 100,000. Some are going over the home acquisition debit limits of 1,000,000. I am very confused by Publication 936 on calculating the interest that is not deductible. Any suggestions?
What about lines of credit. Say they take a line of credit of 50,000 but only use 10,000. to pay off credit cards. Is 10,000 the equity amount in calculating the 100,000 limit or 50,000? I would assume the 10,000?
Here is an example. A client buys a home five years ago for 250,000. They put 50,000 down and the loan is for 200,000. Then in 2005 they refi and get a new loan for 475,000.
They use 125,000 of the 275,000 equity to buy a new car pay off tuition and private school. They use the remainder of the equity 150,000 to invest in a rental property. For the rental would I deduct a portion of the interest paid that applies to the 150,000 invested in the rental on Schedule E? 150,000/475,000 & deduct 32% of the interest on Sch E? For the equity part that is over 100,000 how would you calculate the amount deductible? Using the methods in Pub 936 for mixed mortgage use? It seems very confusing? My idea is take 125,000/475,000=26% of the mortgage interest is for the equity. Then take 100,000/125,000=80% of interest of equity is deductible. So take mortgage interest times 26% then multiply by 80% to get the deductible home equity interest. Do I have this totally wrong or I am thinking correctly?
What if they refi a rental property and take out cash for personal purposes? Is that non-deductible personal interest?
Last what about these loans where they have deferred interest and their loan balance goes up because they don't pay enough interest and no principal so it is added to their principal increasing their loan balance? Is that acquisition debt or home equity debt? Say balance was 412,000 at beg of the year and 417,000 at the end of the year. Is the 5,000 add'l debt acquisition debt or equity debt?
Thank you for taking the time to read my post. I have a passion for preparing taxes it can be very challenging at times and keeps my mind fresh. I get to do this full time during tax season and I look forward to the challenges I will face each day. Sometimes I read and read and still don't understand. It is a blessing to have a forum like this that provides guidance and direction when needed.
Thanks!
GTS1101
What about lines of credit. Say they take a line of credit of 50,000 but only use 10,000. to pay off credit cards. Is 10,000 the equity amount in calculating the 100,000 limit or 50,000? I would assume the 10,000?
Here is an example. A client buys a home five years ago for 250,000. They put 50,000 down and the loan is for 200,000. Then in 2005 they refi and get a new loan for 475,000.
They use 125,000 of the 275,000 equity to buy a new car pay off tuition and private school. They use the remainder of the equity 150,000 to invest in a rental property. For the rental would I deduct a portion of the interest paid that applies to the 150,000 invested in the rental on Schedule E? 150,000/475,000 & deduct 32% of the interest on Sch E? For the equity part that is over 100,000 how would you calculate the amount deductible? Using the methods in Pub 936 for mixed mortgage use? It seems very confusing? My idea is take 125,000/475,000=26% of the mortgage interest is for the equity. Then take 100,000/125,000=80% of interest of equity is deductible. So take mortgage interest times 26% then multiply by 80% to get the deductible home equity interest. Do I have this totally wrong or I am thinking correctly?
What if they refi a rental property and take out cash for personal purposes? Is that non-deductible personal interest?
Last what about these loans where they have deferred interest and their loan balance goes up because they don't pay enough interest and no principal so it is added to their principal increasing their loan balance? Is that acquisition debt or home equity debt? Say balance was 412,000 at beg of the year and 417,000 at the end of the year. Is the 5,000 add'l debt acquisition debt or equity debt?
Thank you for taking the time to read my post. I have a passion for preparing taxes it can be very challenging at times and keeps my mind fresh. I get to do this full time during tax season and I look forward to the challenges I will face each day. Sometimes I read and read and still don't understand. It is a blessing to have a forum like this that provides guidance and direction when needed.
Thanks!
GTS1101
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