Discussion:Mortgage Interest Again
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Discussion Forum Index --> Tax Questions --> Mortgage Interest Again
Actionbsns (talk|edits) said: | 18 August 2009 |
| I know this has been discussed, but I can't find a discussion that answers my question.
My client re-financed this year, the original mortgage was $129700 but on the re-fi date it was down to $122138.48. There was also an existing second on this property of $45,990, but I don't think that's relevant, it was paid off with the re-fi. He took out a loan on the house for $330,000, this does not exceed the FMV of the home. I'm getting that the original loan plus $100,000 in home equity loan is 67.5% of the new mortgage, which would mean that 32.5% of the interest paid after the re-fi would be considered consumer interest and not deductible. Is that correct? Second part of this, he and his wife have moved out of the area and now the house is a rental with two tenants (one in the main house, one in the ohana). How will that impact his ability to deduct interest on Schedule E? | |
| 18 August 2009 | |
| Your analysis seems to be correct. However, the interest on the $100,000 home equity portion of the debt will not be deductible, beginning on the date the property was converted to rental purposes. | |
Actionbsns (talk|edits) said: | 18 August 2009 |
| Thanks Riley, I really appreciate your help. | |
| 18 August 2009 | |
| was the original second mortgage used to acquire or substantially improve the house? | |
Actionbsns (talk|edits) said: | 18 August 2009 |
| EK, answer to your question is no. I've been thinking this through all night - literally in my dreams! Why would the home equity portion of the debt be non-deductible when the property converted to a rental? I don't recall reading anything about that specifically what comes to mind is that original mortgage plus $100,000 is deductible, and I will admit that I don't have research material available either in my dreams or at home. | |
Death&Taxes (talk|edits) said: | 18 August 2009 |
| One simple way to see this is to consider what would occur if your client borrowed the equity out of a rental property and used it for toys or anything but the rental....no deduction for the interest in that case. | |
Laketahoecpa (talk|edits) said: | 18 August 2009 |
| ยง163(h)(3)(C) - the home equity debt has to be secured by qualified residence. A qualified residence is your principal residence or 2nd home that you use as residence.
Home equity debt on rental property doesn't meet requirement. | |
Michaelstar (talk|edits) said: | 18 August 2009 |
| Action - another way to consider this is that the interest on the $100,000 equity debt (assuming it can not be traced to investments, business, etc..) is allowed mortgage interest (for regular tax only) on the primary residence. Once converted to a rental, it is no longer allowed primary mortgage interest and is not deductible on the rental because although the rental secures the debt, the proceeds were not utilized on the rental property.
Also, in line with this - one can not refinance a rental property, take out additional proceeds from the refinance and deduct the interest expense attributable to those proceeds taken out against the rental activity unless fully utilized on the rental. The interest expense on that additional debt follows what the proceeds were utilized for under the interest tracing rules. | |
Actionbsns (talk|edits) said: | 18 August 2009 |
| Thanks everyone. So Michaelstar, from your last line, if I understand that comment, even though the extra $100,000 is not actually an equity line, but additional funds on the loan, it would not be deductible and I would need to reflect that in the deductible amount of interest. What actually transpired was payoff of original debt, second loan on that property, the mortgage of a second home in another state, and some smaller loans. It actually seems like I should take a percentage of the interest based on the original debt and second loan combined, against the total loan which would be about 51% and the balance would be consumer interest and non deductible. | |
Laketahoecpa (talk|edits) said: | 18 August 2009 |
| You can't include that second loan of 45,990 in your numerator to figure out deductible interest. If I read the posts correctly, this money was not used to aquire or improve the property. Your percentage of deductible interest would be 37% (122,138/330,00). | |
Michaelstar (talk|edits) said: | 18 August 2009 |
| I agree with Laketahoecpa's fraction of (122,138/330,00). Also remember, under the ordering rules, personal debt is now being paid down first. | |
Actionbsns (talk|edits) said: | 18 August 2009 |
| Thanks Laketahoe and Michael, I've adjusted accordingly. | |
