Discussion Archives:Does the $1MM Mortgage Interest Limit Apply to ALL?

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Discussion Forum Index --> Advanced Tax Questions --> Does the $1MM Mortgage Interest Limit Apply to ALL?


Discussion Forum Index --> Tax Questions --> Does the $1MM Mortgage Interest Limit Apply to ALL?

Umk395 (talk|edits) said:

20 March 2010

Am preparing a return where the client has three properties:

Home in Iowa ($1.2MM mortgage) Vacation Home in Florida ($450,000 mortgage) Vacation Home #2 in Boston (No mortgage)

They also have a $150K HELOC on the Iowa home (in addition to the $1.2MM mortgage)

I know that the deduction for interest on mortgages over $1MM are limited, but is that applied on ALL mortgages (aggregated), or on a mortgage by mortgage basis?

Less than 4 weeks until freedom!

Death&Taxes (talk|edits) said:

20 March 2010
Total for all mortgages can't exceed 1.1M

KathiJud (talk|edits) said:

20 March 2010
The principal residence and ONE other second home (can choose which one year by year) are what you need to look at. Limit is 1.1 million including the HELOC. The 3rd one is not deducted as home mortgage interest.

KathiJud (talk|edits) said:

20 March 2010
Oh and personal use of homes #2 and #3 preclude being able to treat as investment interest. I saw that one come up in an audit on a return my former partner had prepared.

Belle (talk|edits) said:

March 20, 2010
And don't forget the altmin adjustment.

Umk395 (talk|edits) said:

20 March 2010
What's the issue with the AMT?

Harry Boscoe (talk|edits) said:

20 March 2010
Interest is deductible on only two properties, and only on $1.1M of 'aggregated' principal of the mortgages secured by those properties. Your client has hit *both* of these limits on the first trust on his principal residence.

What did the client use the proceeds of the HELOC for? [There it is, *another* instance of using a preposition to end a sentence with. ] Maybe there's interest there that can be deducted, too.

Belle (talk|edits) said:

March 20, 2010
Home mortgage interest applies to Form 6251 if any of the home mortgage interest reported on Schedule A was not used to buy, build, or improve the main home (interest expense attributable to home equity debt). A positive AMT adjustment.

Umk395 (talk|edits) said:

21 March 2010
The proceeds were all used to refinance the home.

So there isn't an AMT adj based on the above facts, correct?

Death&Taxes (talk|edits) said:

21 March 2010
Assuming the refinanced balance covered the original mortgage, you are correct, but perhaps that original mortgage was not 'original' but a re-fi from 7 years ago when he pulled equity out of the place. It's not easy in this world, is it?

RoyDaleOne (talk|edits) said:

21 March 2010
Is not the current IRS that 1.1 mortgage can be in one loan, and does not necessarily have to be a line of credit?

An audit IRS of one of my clients just closed with a single home mortgage loan greater then $2,000,000 all of the proceeds was home acquisition the IRS allowed interest on the prorated $1,100,000 portion of the loan.

Umk395 (talk|edits) said:

21 March 2010
OK -- so it looks like no AMT adj on my end then. I'll net all mortgages and then disallow the percentage over $1.1MM.

Can I just take the 1/1/09 and 12/31/09 aggregate mortgage balances and take the average for purposes of determining the balance that exceeeds $1.1MM -- and then apply that to the aggregate mortgage interest to arrive at the amount of interest that would be allowed/disallowed?

KathiJud (talk|edits) said:

21 March 2010
Nope the IRS requires you to use the mortgages in this order (keep in mind that varying rates apply so they had to have a specified order):

1) Principal Residence mortgage. If balance of loans is under the $1.1 limit you can move to next step. In your case you don't get past this. Prorate the 1.1 mil of mtge to the average balance of that mortgage for the year. Multiply that fraction times the interest paid. Done. HELOC not considered at all.

2) Your chosen second residence for the year. If average mtge for the year in step one is below the 1.1 mil limit - calc your average mtge for the year for this home. Use appropriate fractions for home #1 and home #2.

Tm ea (talk|edits) said:

27 April 2010
I still think the interest related to the $100,000 of the $1.1 mil is an AMT adjustment. Home interest is limited to $1 mil and the $100k is considered equity interest, subject to AMT adjustment, even if it was used to acquire or improve the home.

Death&Taxes (talk|edits) said:

27 April 2010
read Discussion: Chief Counsel rejects Pau LH2004 was kind enough to print the Chief Counsel's memorandum in toto.

Doug M (talk|edits) said:

28 April 2010
Kathi:

I have a different understanding of the law. If you have mortgages that are in excess of the 1.1MM limit, you must use one of the two methods outlined in the law. Exact method or simplified method.

Under the exact method, you use the mortgages on a debt-by-debt basis, from earliest to latest. So, principal residence vs. second home is not relevant. It is the earliest mortgage incurred that is used first. You might have owned an RV before you acquired your residence, or owned your vacation home before you acquired your current principal residence.

Using the simplified method, you use the average balances of all mortgage loans for the year (temp reg 1.163-10-T(e)).

MrActuary (talk|edits) said:

1 September 2010
Here's a question:

Suppose a couple has 3 properties during the 2010 tax year: Property 1 was owned the entire year Property 2 was sold 9/23/2010 Property 3 was purchased 10/29/2010

No mortgages were considered GF debt and no properties were rented (no investment properties).

Property 1: Mortgage Int = $13,000 (i = 4.625%) Property 2: Mortgage Int = $27,000 (i = 6.000%) Property 3: Mortgage Int = $10,600 (i = 4.750%)

How is the average mortgage balance calculated ? Can you simply do: $13,000 /.04625 + $27,000/.06 + $10,600/.0475 = $954,239 ?

The mortgage on Property 3 was for $1,340,000....but since it was only for 2 months the interest method essentially prorates the balance.

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