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Posted by way111 on May 27, 2008, 4:11 pm
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Some questions about the mortgage interest deduction:
Scenario 1:
Purchased my home for $250,000. Over time put in $200,000 of
improvements. Currently owe $130,000 on the primary mortgage, and
$160,000 on a HELOC, $70K of which was used to purchase and improve a
rental property. This year I deducted interest from $90,000 of the
HELOC on schedule A, and $70,000 on schedule E.
I'm considering refinancing for $500,000 and using the $210,000 I cash
out to buy a single-premium life insurance policy (this is for
financial aid for college reasons).
How much of this interest on the $500,000 mortgage is now deductible?
Scenario 2:
Purchased a rental property for $150,000. Over time have done around
$75,000 in improvements. Current mortgage balance is around $90,000.
If I refinance this property for $175,000, how much of the interest of
this is deductible? Does it depend on what I use the proceeds for?
In general, if the mortgage amount is smaller than the purchase price
+ improvements, is it deductible?
Thanks for any help.
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Posted by Bill Brown on May 27, 2008, 4:46 pm
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On May 27, 4:11 pm, way...@gmail.com wrote:
> Some questions about the mortgage interest deduction:
>
> Scenario 1:
>
> Purchased my home for $250,000. Over time put in $200,000 of
> improvements. Currently owe $130,000 on the primary mortgage, and
> $160,000 on a HELOC, $70K of which was used to purchase and improve a
> rental property. This year I deducted interest from $90,000 of the
> HELOC on schedule A, and $70,000 on schedule E.
>
> I'm considering refinancing for $500,000 and using the $210,000 I cash
> out to buy a single-premium life insurance policy (this is for
> financial aid for college reasons).
>
> How much of this interest on the $500,000 mortgage is now deductible?
>
That depends on whether interest on debt to fund a single premium life
insurance policy is deductible as investment interest.
On a personal home mortgage with mixed use of the proceeds, the first
principal payments reduce the amounts generating interest not
deductible as home mortgage interest (investment interest, personal
interest, Schedule C, E, or F interest, etc). Once that portion has
been paid off, the next principal payments apply to the balance
generating interest deductible as home equity indebtedness. The last
principal amount to be paid off is any portion qualifying as
acquisition indebtedness.
> Scenario 2:
>
> Purchased a rental property for $150,000. Over time have done around
> $75,000 in improvements. Current mortgage balance is around $90,000.
>
> If I refinance this property for $175,000, how much of the interest of
> this is deductible? Does it depend on what I use the proceeds for?
>
It depends on what you use the proceeds for.
> In general, if the mortgage amount is smaller than the purchase price
> + improvements, is it deductible?
Not necessarily. Once home acquisition indebtedness is paid down, it
cannot increase again unless the proceeds pay for additional
improvements in the home.
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Posted by removeps-groups@yahoo.com on May 27, 2008, 5:34 pm
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> That depends on whether interest on debt to fund a single premium life
> insurance policy is deductible as investment interest.
How does one determine this?
> On a personal home mortgage with mixed use of the proceeds, the first
> principal payments reduce the amounts generating interest not
> deductible as home mortgage interest (investment interest, personal
> interest, Schedule C, E, or F interest, etc). Once that portion has
> been paid off, the next principal payments apply to the balance
> generating interest deductible as home equity indebtedness. The last
> principal amount to be paid off is any portion qualifying as
> acquisition indebtedness.
What's the difference between "home equity indebtedness" and "home
acquisition indebtedness"?
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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Posted by Arthur Kamlet on May 27, 2008, 5:53 pm
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>> On a personal home mortgage with mixed use of the proceeds, the first
>> principal payments reduce the amounts generating interest not
>> deductible as home mortgage interest (investment interest, personal
>> interest, Schedule C, E, or F interest, etc). Once that portion has
>> been paid off, the next principal payments apply to the balance
>> generating interest deductible as home equity indebtedness. The last
>> principal amount to be paid off is any portion qualifying as
>> acquisition indebtedness.
>
>What's the difference between "home equity indebtedness" and "home
>acquisition indebtedness"?
A mortgage is a loan secured by the home, which the taxpayer is
obligated to pay and is, generally recorded with the local government.
Acquisition indebtedness is a mortgage used to buy, build or
improve the home.
Home Equity indebtedness is a mortgage that is not Acquisition
indebtedness.
You can take a schedule A deduction for home acquisition indebtedness
of up to $1 million of principal and an additional 100,000 of home
equity indebtedness for your main home plus one second home.
Principal in excess of $1million of home acquisition debt is treated
as home equity indebtedness.
Interest on home equity debt, but not home acquisition debt, is an AMT
preference item which can add to AMT.
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
--
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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Posted by Mark Bole on May 27, 2008, 10:00 pm
Please log in for more thread options removeps-groups@yahoo.com wrote:
>> On a personal home mortgage with mixed use of the proceeds, the first
>> principal payments reduce the amounts generating interest not
>> deductible as home mortgage interest (investment interest, personal
>> interest, Schedule C, E, or F interest, etc).
This sounds good, and I am not trying to contradict it, but is there an
IRS pub somewhere which describes this treatment, or provides a
worksheet? My inclination would be to treat the different uses (other
than personal) as different virtual mortgages and amortize each one
separately (assuming a fixed-rate, fully amortized mortgage). In other
words, the principal portion of each payment would reduce the balance on
which interest is paid for *each* use, in proportion to the original
share of the proceeds used.
No matter what, this whole area clearly can require complicated,
detailed record-keeping.
> What's the difference between "home equity indebtedness" and "home
> acquisition indebtedness"?
>
See IRS Pub 936, which also includes a handy worksheet (table 1,
"Worksheet To Figure Your Qualified Loan Limit and Deductible
Home Mortgage Interest For the Current Year"). Don't forget also the
third category of home mortgage interest debt, "Grandfathered". Anyone
whose pre-1987 mortgage end date has not yet passed (whether the
mortgage has been paid off or not), and who has been living in the same
house since before May 1987, and who had a mortgage at that time and has
never fully paid it off, probably has some grandfathered debt.
-Mark Bole
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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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