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Acquisition Debt vs Home Equity Debt & Cash Out Refinancing
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Alan
Jan 23, 2012, 1:38:52 PM1/23/12
to
A friend wants to buy a vacation home (second home) by refinancing the
mortgage loan on his main home. Here is the plan:
Refinance main home loan by paying off the $200K balance with a new
$350K loan secured by his main home with $150K cash out. Assume the loan
closes on March 1, 2012. The $150K will be parked in a savings account
pending the purchase of the vacation home. He makes an offer on May 15,
2012 to buy a home. He closes on the new home on June 30, 2012. He pays
$300K for the home by withdrawing the $150K he borrowed on his main home
and adds to that $150K that he has.
I'm trying to figure out come July 1, 2012, how much acquisition debt he
has and how much home equity debt he has (if any) and how much interest
expense is deductible as mortgage interest.
What are his options for deducting interest expense during the 4 month
period that the $150K was sitting in a savings account?
Would it matter if he closed on the new home within a shorter period of
time, say less than 90 days after borrowing the money?
What if he deposits the $150K loan proceeds in a savings account that
contains $200K, bringing the balance to $350K. Is there any tracing
problem when he withdraws the $300K to purchase the vacation home?
--
Alan
http://taxtopics.net
--
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mortgage loan on his main home. Here is the plan:
Refinance main home loan by paying off the $200K balance with a new
$350K loan secured by his main home with $150K cash out. Assume the loan
closes on March 1, 2012. The $150K will be parked in a savings account
pending the purchase of the vacation home. He makes an offer on May 15,
2012 to buy a home. He closes on the new home on June 30, 2012. He pays
$300K for the home by withdrawing the $150K he borrowed on his main home
and adds to that $150K that he has.
I'm trying to figure out come July 1, 2012, how much acquisition debt he
has and how much home equity debt he has (if any) and how much interest
expense is deductible as mortgage interest.
What are his options for deducting interest expense during the 4 month
period that the $150K was sitting in a savings account?
Would it matter if he closed on the new home within a shorter period of
time, say less than 90 days after borrowing the money?
What if he deposits the $150K loan proceeds in a savings account that
contains $200K, bringing the balance to $350K. Is there any tracing
problem when he withdraws the $300K to purchase the vacation home?
--
Alan
http://taxtopics.net
--
<< ------------------------------------------------------- >>
<< 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 (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
Alan
Jan 23, 2012, 2:16:33 PM1/23/12
to
On 1/23/12 11:38 AM, Alan wrote:
> A friend wants to buy a vacation home (second home) by refinancing the
> mortgage loan on his main home. Here is the plan:
>
> Refinance main home loan by paying off the $200K balance with a new
> $350K loan secured by his main home with $150K cash out. Assume the loan
> closes on March 1, 2012. The $150K will be parked in a savings account
> pending the purchase of the vacation home. He makes an offer on May 15,
> 2012 to buy a home. He closes on the new home on June 30, 2012. He pays
> $300K for the home by withdrawing the $150K he borrowed on his main home
> and adds to that $150K that he has.
>
> I'm trying to figure out come July 1, 2012, how much acquisition debt he
> has and how much home equity debt he has (if any) and how much interest
> expense is deductible as mortgage interest.
>
> What are his options for deducting interest expense during the 4 month
> period that the $150K was sitting in a savings account?
>
> Would it matter if he closed on the new home within a shorter period of
> time, say less than 90 days after borrowing the money?
>
> What if he deposits the $150K loan proceeds in a savings account that
> contains $200K, bringing the balance to $350K. Is there any tracing
> problem when he withdraws the $300K to purchase the vacation home?
>
The third paragraph should have read:
> A friend wants to buy a vacation home (second home) by refinancing the
> mortgage loan on his main home. Here is the plan:
>
> Refinance main home loan by paying off the $200K balance with a new
> $350K loan secured by his main home with $150K cash out. Assume the loan
> closes on March 1, 2012. The $150K will be parked in a savings account
> pending the purchase of the vacation home. He makes an offer on May 15,
> 2012 to buy a home. He closes on the new home on June 30, 2012. He pays
> $300K for the home by withdrawing the $150K he borrowed on his main home
> and adds to that $150K that he has.
>
> I'm trying to figure out come July 1, 2012, how much acquisition debt he
> has and how much home equity debt he has (if any) and how much interest
> expense is deductible as mortgage interest.
>
> What are his options for deducting interest expense during the 4 month
> period that the $150K was sitting in a savings account?
>
> Would it matter if he closed on the new home within a shorter period of
> time, say less than 90 days after borrowing the money?
>
> What if he deposits the $150K loan proceeds in a savings account that
> contains $200K, bringing the balance to $350K. Is there any tracing
> problem when he withdraws the $300K to purchase the vacation home?
>
"..... and how much interest expense is deductible as mortgage interest
or investment interest.
Message has been deleted
Alan
Jan 23, 2012, 6:15:40 PM1/23/12
to
On 1/23/12 1:14 PM, D. Stussy wrote:
> "Alan"<temp...@vacationmail.com> wrote in message
> news:jfk9fh$1vi$1...@dont-email.me...
> Equity debt: $100k. (on main home)
> Non-qualified debt: $50k. (NO interest deduction)
>
> Not too hard.
>
I really don't think that is true as you are allowed to acquire a second
home by refinancing your main home. The law does not require that the
second home be the home that secures the mortgage. You only need to have
the mortgage secured by a first or second home. As much as I don't like
to use IRS Pubs as a reference, here is what Pub 936 says:
Refinanced Home Acquisition Debt
Any secured debt you use to refinance home acquisition debt is treated
as home acquisition debt. However, the new debt will qualify as home
acquisition debt only up to the amount of the balance of the old
mortgage principal just before the refinancing. Any additional debt not
used to buy, build, or substantially improve a qualified home is not
home acquisition debt, but may qualify as home equity debt (discussed
later).
Notice that it says that any excess over the old balance that is used to
"buy" a qualified home will count as acquisition debt. My concern is the
timing. Clearly, you can't borrow more than the balance and wait 10
years before you buy that second home and say that the debt for those 10
years was acquisition debt. So... what is the time period you are
allowed to have either before you buy the home or after you buy the home
to take out the loan and have it treated as acquisition debt?
In addition, if my friend parks the money in an account that is
generating interest or dividend income why wouldn't the interest expense
be investment interest and deductible to the extent that he has
investment income?
> "Alan"<temp...@vacationmail.com> wrote in message
> news:jfk9fh$1vi$1...@dont-email.me...
>> A friend wants to buy a vacation home (second home) by refinancing the
>> mortgage loan on his main home. Here is the plan:
>>
>> Refinance main home loan by paying off the $200K balance with a new
>> $350K loan secured by his main home with $150K cash out. Assume the loan
>> closes on March 1, 2012. The $150K will be parked in a savings account
>> pending the purchase of the vacation home. He makes an offer on May 15,
>> 2012 to buy a home. He closes on the new home on June 30, 2012. He pays
>> $300K for the home by withdrawing the $150K he borrowed on his main home
>> and adds to that $150K that he has.
>>
>> I'm trying to figure out come July 1, 2012, how much acquisition debt he
>> has and how much home equity debt he has (if any) and how much interest
>> expense is deductible as mortgage interest.
>>
>> What are his options for deducting interest expense during the 4 month
>> period that the $150K was sitting in a savings account?
>>
>> Would it matter if he closed on the new home within a shorter period of
>> time, say less than 90 days after borrowing the money?
>>
>> What if he deposits the $150K loan proceeds in a savings account that
>> contains $200K, bringing the balance to $350K. Is there any tracing
>> problem when he withdraws the $300K to purchase the vacation home?
>
> Acquisition debt: $200k. (on main home)
>> mortgage loan on his main home. Here is the plan:
>>
>> Refinance main home loan by paying off the $200K balance with a new
>> $350K loan secured by his main home with $150K cash out. Assume the loan
>> closes on March 1, 2012. The $150K will be parked in a savings account
>> pending the purchase of the vacation home. He makes an offer on May 15,
>> 2012 to buy a home. He closes on the new home on June 30, 2012. He pays
>> $300K for the home by withdrawing the $150K he borrowed on his main home
>> and adds to that $150K that he has.
>>
>> I'm trying to figure out come July 1, 2012, how much acquisition debt he
>> has and how much home equity debt he has (if any) and how much interest
>> expense is deductible as mortgage interest.
>>
>> What are his options for deducting interest expense during the 4 month
>> period that the $150K was sitting in a savings account?
>>
>> Would it matter if he closed on the new home within a shorter period of
>> time, say less than 90 days after borrowing the money?
>>
>> What if he deposits the $150K loan proceeds in a savings account that
>> contains $200K, bringing the balance to $350K. Is there any tracing
>> problem when he withdraws the $300K to purchase the vacation home?
>
> Equity debt: $100k. (on main home)
> Non-qualified debt: $50k. (NO interest deduction)
>
> Not too hard.
>
I really don't think that is true as you are allowed to acquire a second
home by refinancing your main home. The law does not require that the
second home be the home that secures the mortgage. You only need to have
the mortgage secured by a first or second home. As much as I don't like
to use IRS Pubs as a reference, here is what Pub 936 says:
Refinanced Home Acquisition Debt
Any secured debt you use to refinance home acquisition debt is treated
as home acquisition debt. However, the new debt will qualify as home
acquisition debt only up to the amount of the balance of the old
mortgage principal just before the refinancing. Any additional debt not
used to buy, build, or substantially improve a qualified home is not
home acquisition debt, but may qualify as home equity debt (discussed
later).
Notice that it says that any excess over the old balance that is used to
"buy" a qualified home will count as acquisition debt. My concern is the
timing. Clearly, you can't borrow more than the balance and wait 10
years before you buy that second home and say that the debt for those 10
years was acquisition debt. So... what is the time period you are
allowed to have either before you buy the home or after you buy the home
to take out the loan and have it treated as acquisition debt?
In addition, if my friend parks the money in an account that is
generating interest or dividend income why wouldn't the interest expense
be investment interest and deductible to the extent that he has
investment income?
removep...@yahoo.com
Jan 23, 2012, 9:00:46 PM1/23/12
to
On Jan 23, 10:38 am, Alan <tempu...@vacationmail.com> wrote:
> A friend wants to buy a vacation home (second home) by refinancing the
> mortgage loan on his main home. Here is the plan:
>
> Refinance main home loan by paying off the $200K balance with a new
> $350K loan secured by his main home with $150K cash out. Assume the loan
> closes on March 1, 2012. The $150K will be parked in a savings account
> pending the purchase of the vacation home. He makes an offer on May 15,
> 2012 to buy a home. He closes on the new home on June 30, 2012. He pays
> $300K for the home by withdrawing the $150K he borrowed on his main home
> and adds to that $150K that he has.
Why doesn't he just get a 150k mortgage for the vacation home, and
> A friend wants to buy a vacation home (second home) by refinancing the
> mortgage loan on his main home. Here is the plan:
>
> Refinance main home loan by paying off the $200K balance with a new
> $350K loan secured by his main home with $150K cash out. Assume the loan
> closes on March 1, 2012. The $150K will be parked in a savings account
> pending the purchase of the vacation home. He makes an offer on May 15,
> 2012 to buy a home. He closes on the new home on June 30, 2012. He pays
> $300K for the home by withdrawing the $150K he borrowed on his main home
> and adds to that $150K that he has.
leave the main home alone? Then total loans for 2 home is for 350k of
loan and all can be deducted. The way he's doing it above is changing
mortgage on main home to 350k and no mortgage on second home. It
looks equivalent. Per the substance over form doctrine, it looks like
the entire new 350k mortgage is deductible.
> I'm trying to figure out come July 1, 2012, how much acquisition debt he
> has and how much home equity debt he has (if any) and how much interest
> expense is deductible as mortgage interest.
>
> What are his options for deducting interest expense during the 4 month
> period that the $150K was sitting in a savings account?
>
> Would it matter if he closed on the new home within a shorter period of
> time, say less than 90 days after borrowing the money?
2nd home, a portion of the mortgage interest is non-qualified debt, so
he should reduce the amount of the 1098-M (the form for mortgage I
think) on his Schedule A. The calculation is complicated. You can
divide the total interest by 12 to get the average per month (although
to be exact the mortgage interest changes each month), or you can look
at the monthly statements which often say what the interest was for
that month, then get the total interest for those 3 months and call
this I, and multiply I by 200/350 and call the result M1, and the
reduce the mortgage interest on 1098 by this amount M1. As long as
the 150k was in a tax bearing account then consider 100k as equity
debt so multiple I by 100/350 to get M2, and this is home equity
interest deduction which is not allowed under AMT. The remaining
I*50/350 is lost.
> What if he deposits the $150K loan proceeds in a savings account that
> contains $200K, bringing the balance to $350K. Is there any tracing
> problem when he withdraws the $300K to purchase the vacation home?
hold the 300k seems retarded, but seeing that is so easy to open an
account these days, and maybe get $100 bonus for doing so, why not go
for it?
Alan
Jan 23, 2012, 10:07:57 PM1/23/12
to
On 1/23/12 7:00 PM, removep...@yahoo.com wrote:
> On Jan 23, 10:38 am, Alan<tempu...@vacationmail.com> wrote:
>
>> A friend wants to buy a vacation home (second home) by refinancing the
>> mortgage loan on his main home. Here is the plan:
>>
>> Refinance main home loan by paying off the $200K balance with a new
>> $350K loan secured by his main home with $150K cash out. Assume the loan
>> closes on March 1, 2012. The $150K will be parked in a savings account
>> pending the purchase of the vacation home. He makes an offer on May 15,
>> 2012 to buy a home. He closes on the new home on June 30, 2012. He pays
>> $300K for the home by withdrawing the $150K he borrowed on his main home
>> and adds to that $150K that he has.
>
> Why doesn't he just get a 150k mortgage for the vacation home, and
> leave the main home alone? Then total loans for 2 home is for 350k of
> loan and all can be deducted. The way he's doing it above is changing
> mortgage on main home to 350k and no mortgage on second home. It
> looks equivalent. Per the substance over form doctrine, it looks like
> the entire new 350k mortgage is deductible.
The interest rate on current loan is 5.75%. He can refi at 3.9%. Better
> On Jan 23, 10:38 am, Alan<tempu...@vacationmail.com> wrote:
>
>> A friend wants to buy a vacation home (second home) by refinancing the
>> mortgage loan on his main home. Here is the plan:
>>
>> Refinance main home loan by paying off the $200K balance with a new
>> $350K loan secured by his main home with $150K cash out. Assume the loan
>> closes on March 1, 2012. The $150K will be parked in a savings account
>> pending the purchase of the vacation home. He makes an offer on May 15,
>> 2012 to buy a home. He closes on the new home on June 30, 2012. He pays
>> $300K for the home by withdrawing the $150K he borrowed on his main home
>> and adds to that $150K that he has.
>
> Why doesn't he just get a 150k mortgage for the vacation home, and
> leave the main home alone? Then total loans for 2 home is for 350k of
> loan and all can be deducted. The way he's doing it above is changing
> mortgage on main home to 350k and no mortgage on second home. It
> looks equivalent. Per the substance over form doctrine, it looks like
> the entire new 350k mortgage is deductible.
to have a 350K loan at 3.9% then a 200K loan @ 5.75% and a 150K @ 3.9%.
>
>> I'm trying to figure out come July 1, 2012, how much acquisition debt he
>> has and how much home equity debt he has (if any) and how much interest
>> expense is deductible as mortgage interest.
>>
>> What are his options for deducting interest expense during the 4 month
>> period that the $150K was sitting in a savings account?
>>
>> Would it matter if he closed on the new home within a shorter period of
>> time, say less than 90 days after borrowing the money?
>
> Maybe for those 90 days, or however long it took him to close on the
> 2nd home, a portion of the mortgage interest is non-qualified debt, so
> he should reduce the amount of the 1098-M (the form for mortgage I
> think) on his Schedule A. The calculation is complicated. You can
> divide the total interest by 12 to get the average per month (although
> to be exact the mortgage interest changes each month), or you can look
> at the monthly statements which often say what the interest was for
> that month, then get the total interest for those 3 months and call
> this I, and multiply I by 200/350 and call the result M1, and the
> reduce the mortgage interest on 1098 by this amount M1. As long as
> the 150k was in a tax bearing account then consider 100k as equity
> debt so multiple I by 100/350 to get M2, and this is home equity
> interest deduction which is not allowed under AMT. The remaining
> I*50/350 is lost.
Here's the problem I am having. If I was going to buy a new home and
>> I'm trying to figure out come July 1, 2012, how much acquisition debt he
>> has and how much home equity debt he has (if any) and how much interest
>> expense is deductible as mortgage interest.
>>
>> What are his options for deducting interest expense during the 4 month
>> period that the $150K was sitting in a savings account?
>>
>> Would it matter if he closed on the new home within a shorter period of
>> time, say less than 90 days after borrowing the money?
>
> Maybe for those 90 days, or however long it took him to close on the
> 2nd home, a portion of the mortgage interest is non-qualified debt, so
> he should reduce the amount of the 1098-M (the form for mortgage I
> think) on his Schedule A. The calculation is complicated. You can
> divide the total interest by 12 to get the average per month (although
> to be exact the mortgage interest changes each month), or you can look
> at the monthly statements which often say what the interest was for
> that month, then get the total interest for those 3 months and call
> this I, and multiply I by 200/350 and call the result M1, and the
> reduce the mortgage interest on 1098 by this amount M1. As long as
> the 150k was in a tax bearing account then consider 100k as equity
> debt so multiple I by 100/350 to get M2, and this is home equity
> interest deduction which is not allowed under AMT. The remaining
> I*50/350 is lost.
take out a mortgage, there is some period of time both before and after
the closing that I can get the loan and have it treated as acquisition
debt. The IRS Pub (page 9) says that the window is plus or minus 90 days
from the closing.
I have always assumed that if you met the 90 day window before closing,
you could deduct all the interest you paid before the closing. I wasn't
sure what happened if you missed the 90 day window (hence my original
example). Is it that if you miss the 90 day window, it is gone and
(using my example) you have this 4 month period that has to be accounted
for? I know he can treat 100K as HE debt for that period and deduct the
interest. I'm almost sure he can treat the 4 months of interest on the
$50K as investment interest expense as long as he keeps it invested. (No
one has replied to this part of my original post.)
But... the IRS pub also says that a mortgage that fails the test for
acquisition debt can qualify later as acquisition debt. So.. does this
mean if the $150K is not acquisition debt for the 4 month period (it's
HE and Investment Interest) and then upon closing it becomes acquisition
debt and reduces his HE debt back to zero?
>
>> What if he deposits the $150K loan proceeds in a savings account that
>> contains $200K, bringing the balance to $350K. Is there any tracing
>> problem when he withdraws the $300K to purchase the vacation home?
>
> No, if I were an IRS agent. Requiring them to create a new account to
> hold the 300k seems retarded, but seeing that is so easy to open an
> account these days, and maybe get $100 bonus for doing so, why not go
> for it?
>
--
http://taxtopics.net
Gene E. Utterback, EA, ABA
Jan 24, 2012, 1:30:43 PM1/24/12
to
"Alan" wrote in message news:jfk9fh$1vi$1...@dont-email.me...
A friend wants to buy a vacation home (second home) by refinancing the
mortgage loan on his main home. Here is the plan:
Refinance main home loan by paying off the $200K balance with a new
$350K loan secured by his main home with $150K cash out. Assume the loan
closes on March 1, 2012. The $150K will be parked in a savings account
pending the purchase of the vacation home. He makes an offer on May 15,
2012 to buy a home. He closes on the new home on June 30, 2012. He pays
$300K for the home by withdrawing the $150K he borrowed on his main home
and adds to that $150K that he has.
I'm trying to figure out come July 1, 2012, how much acquisition debt he
has and how much home equity debt he has (if any) and how much interest
expense is deductible as mortgage interest.
What are his options for deducting interest expense during the 4 month
period that the $150K was sitting in a savings account?
Would it matter if he closed on the new home within a shorter period of
time, say less than 90 days after borrowing the money?
What if he deposits the $150K loan proceeds in a savings account that
contains $200K, bringing the balance to $350K. Is there any tracing
problem when he withdraws the $300K to purchase the vacation home?
$200K acquisition debt - fully deductible on Schedule A
$100K in equity debt - fully deductible on Schedule A BUT an ADD BACK for
AMT calculations
$50K in excess equity debt - no deduction anywhere.
AFTER he actually buys the second home, he has:
$200K acquisition debt on his main home - fully deductible on Schedule A;
$150K of acquisition debt on he second home - fully deductible on Schedule
A;
$0 excess equity debt - no deduction and no add backs for AMT.
You have to follow the IRS "tracing rules" for equity debt to see where it
goes and how to report it.
Gene E. Utterback, EA, RFC, ABA
removep...@yahoo.com
Jan 24, 2012, 2:49:57 PM1/24/12
to
On Jan 24, 10:30 am, "Gene E. Utterback, EA, ABA"
the entire 150k be investment interest -- fully deductible on Schedule
A, no itemized deduction phaseout, no AMT? Is there a definition of
investment interest somewhere?
<G...@AllianceTax.Com> wrote:
> UNTIL The second home is purchased, he has -
> $200K acquisition debt - fully deductible on Schedule A
> $100K in equity debt - fully deductible on Schedule A BUT an ADD BACK for
> AMT calculations
> $50K in excess equity debt - no deduction anywhere.
Why can't the 50k be investment interest. For that matter, why not
> UNTIL The second home is purchased, he has -
> $200K acquisition debt - fully deductible on Schedule A
> $100K in equity debt - fully deductible on Schedule A BUT an ADD BACK for
> AMT calculations
> $50K in excess equity debt - no deduction anywhere.
the entire 150k be investment interest -- fully deductible on Schedule
A, no itemized deduction phaseout, no AMT? Is there a definition of
investment interest somewhere?
Message has been deleted
Message has been deleted
Message has been deleted
removep...@yahoo.com
Jan 24, 2012, 6:19:21 PM1/24/12
to
On Jan 24, 1:02 pm, "D. Stussy" <spam+newsgro...@bde-arc.ampr.org>
wrote:
> > A, no itemized deduction phaseout, no AMT? Is there a definition of
> > investment interest somewhere?
>
> Investment interest must be tied to portfolio income. Use of real-estate
> as a residence is personal use which disqualifies any "investment use."
The 150k of money is sitting in a bank account earning interest, and
thus it is portfolio income. So the interest on this 150k ought to be
investment interest.
> Regardless, any use as an investment with NO income generated by it would
> defer any interest expense deduction until its future sale [at a recognized
> profit], thus denying any current deduction.
Are you saying the the investment interest is on a per item basis?
Meaning that investment interest on stock A is limited to the
investment income from stock A, with the excess being carried over? I
thought that instead it worked like this: investment interest on stock
A is limited to investment income from all stocks -- which is what
form http://www.irs.gov/pub/irs-pdf/f4952.pdf suggests. So if your
income from stock A is zero, interest on it is 20k, and you have 21k
in 1099-INT income, you can still deduct the full 20k of interest.
wrote:
> > A, no itemized deduction phaseout, no AMT? Is there a definition of
> > investment interest somewhere?
>
> as a residence is personal use which disqualifies any "investment use."
The 150k of money is sitting in a bank account earning interest, and
thus it is portfolio income. So the interest on this 150k ought to be
investment interest.
> Regardless, any use as an investment with NO income generated by it would
> defer any interest expense deduction until its future sale [at a recognized
> profit], thus denying any current deduction.
Are you saying the the investment interest is on a per item basis?
Meaning that investment interest on stock A is limited to the
investment income from stock A, with the excess being carried over? I
thought that instead it worked like this: investment interest on stock
A is limited to investment income from all stocks -- which is what
form http://www.irs.gov/pub/irs-pdf/f4952.pdf suggests. So if your
income from stock A is zero, interest on it is 20k, and you have 21k
in 1099-INT income, you can still deduct the full 20k of interest.
Alan
Jan 24, 2012, 7:15:16 PM1/24/12
to
On 1/24/12 2:01 PM, D. Stussy wrote:
>>>
>> I really don't think that is true as you are allowed to acquire a second
>> home by refinancing your main home. The law does not require that the
>> second home be the home that secures the mortgage. You only need to have
>> the mortgage secured by a first or second home. As much as I don't like
>> to use IRS Pubs as a reference, here is what Pub 936 says:
>
> Wrong. To be acquisition debt (for the second home), it MUST be secured by
>>>
>> I really don't think that is true as you are allowed to acquire a second
>> home by refinancing your main home. The law does not require that the
>> second home be the home that secures the mortgage. You only need to have
>> the mortgage secured by a first or second home. As much as I don't like
>> to use IRS Pubs as a reference, here is what Pub 936 says:
>
> the home purchased. -- IRC section 163(h)(3)(B)(i)(II).
Here is the section you cite:
(B) Acquisition indebtedness
(i) In general The term “acquisition indebtedness” means any
indebtedness which—
(I) is incurred in acquiring, constructing, or substantially improving
any qualified residence of the taxpayer, and
(II) is secured by such residence.
I think what you are missing is that you are interpreting the words
"such residence" as being one specific residence that secures that loan.
I have always interpreted those words to be a reference to the
"qualified residence" in the preceding sentence. In other words, to be
acquisition debt you buy a "qualified residence" and the loan is secured
by such "qualified residence".
Later in that section it says:
(4) Other definitions and special rules
For purposes of this subsection—
(A) Qualified residence
(i) In general The term “qualified residence” means—
(I) the principal residence (within the meaning of section 121) of the
taxpayer, and
(II) 1 other residence of the taxpayer which is selected by the taxpayer
for purposes of this subsection for the taxable year and which is used
by the taxpayer as a residence (within the meaning of section 280A (d)(1)).
Note that the definition uses the word "and" not "or". Any time you see
the words "qualified residence" it means one home or two homes.
Therefore, as a "qualified residence" takes the meaning of being two
homes, any loan used to buy any of those two homes and is secured by
either or both homes, would be acquisition debt.
This is the way I have always interpreted the rule. It is consistent
with the wording in the laymen's publication 936 that says:
Refinanced home acquisition debt.
Any secured debt you use to refinance home acquisition debt is treated
as home acquisition debt. However, the new debt will qualify as home
acquisition debt only up to the amount of the balance of the old
mortgage principal just before the refinancing. Any additional debt not
used to buy, build, or substantially improve a qualified home is not
home acquisition debt, but may qualify as home equity debt (discussed later)
Notice that it says any new debt that is not used to "buy, build or
as home acquisition debt. However, the new debt will qualify as home
acquisition debt only up to the amount of the balance of the old
mortgage principal just before the refinancing. Any additional debt not
used to buy, build, or substantially improve a qualified home is not
home acquisition debt, but may qualify as home equity debt (discussed later)
substantially improve a qualified home is not acquisition debt." So, if
you use the new debt on a refinanced loan to buy a second home, it is
acquisition debt.
Message has been deleted
Message has been deleted
Gene E. Utterback, EA, ABA
Jan 25, 2012, 12:23:34 PM1/25/12
to
wrote in message
news:28344c6f-f840-425b...@k28g2000yqc.googlegroups.com...
On Jan 24, 10:30 am, "Gene E. Utterback, EA, ABA"
<G...@AllianceTax.Com> wrote:
> UNTIL The second home is purchased, he has -
> $200K acquisition debt - fully deductible on Schedule A
> $100K in equity debt - fully deductible on Schedule A BUT an ADD BACK for
> AMT calculations
> $50K in excess equity debt - no deduction anywhere.
> Why can't the 50k be investment interest. For that matter, why not
> the entire 150k be investment interest -- fully deductible on Schedule
> A, no itemized deduction phaseout, no AMT? Is there a definition of
> investment interest somewhere?
bank account awaiting the purchase of a second home. This does NOT meet the
definition of an investment.
Additionally, investment interest expenses is ONLY deductible to the extent
that you have investment income. So even if it qualified as investment
interest he can only deduct the interest IF he BOTH had investment income
and was able to itemize.
You can check the IRS publications for a definition of Investment Interest -
start with IRS Form 4952 I think.
Gene E. Utterback, EA, RFC, ABA
Alan
Jan 25, 2012, 12:50:13 PM1/25/12
to
On 1/25/12 10:23 AM, Gene E. Utterback, EA, ABA wrote:
>
>
> wrote in message
> news:28344c6f-f840-425b...@k28g2000yqc.googlegroups.com...
>
> On Jan 24, 10:30 am, "Gene E. Utterback, EA, ABA"
> <G...@AllianceTax.Com> wrote:
>
>> UNTIL The second home is purchased, he has -
>> $200K acquisition debt - fully deductible on Schedule A
>> $100K in equity debt - fully deductible on Schedule A BUT an ADD BACK for
>> AMT calculations
>> $50K in excess equity debt - no deduction anywhere.
>
>> Why can't the 50k be investment interest. For that matter, why not
>> the entire 150k be investment interest -- fully deductible on Schedule
>> A, no itemized deduction phaseout, no AMT? Is there a definition of
>> investment interest somewhere?
>
> Well, what was it INVESTED in? From what I read the money was parked in
> a bank account awaiting the purchase of a second home. This does NOT
> meet the definition of an investment.
>
> Additionally, investment interest expenses is ONLY deductible to the
> extent that you have investment income. So even if it qualified as
> investment interest he can only deduct the interest IF he BOTH had
> investment income and was able to itemize.
>
> You can check the IRS publications for a definition of Investment
> Interest - start with IRS Form 4952 I think.
>
> Gene E. Utterback, EA, RFC, ABA
>
Debt that you deposit in a bank account is considered investment
>
>
> wrote in message
> news:28344c6f-f840-425b...@k28g2000yqc.googlegroups.com...
>
> On Jan 24, 10:30 am, "Gene E. Utterback, EA, ABA"
> <G...@AllianceTax.Com> wrote:
>
>> UNTIL The second home is purchased, he has -
>> $200K acquisition debt - fully deductible on Schedule A
>> $100K in equity debt - fully deductible on Schedule A BUT an ADD BACK for
>> AMT calculations
>> $50K in excess equity debt - no deduction anywhere.
>
>> Why can't the 50k be investment interest. For that matter, why not
>> the entire 150k be investment interest -- fully deductible on Schedule
>> A, no itemized deduction phaseout, no AMT? Is there a definition of
>> investment interest somewhere?
>
> Well, what was it INVESTED in? From what I read the money was parked in
> a bank account awaiting the purchase of a second home. This does NOT
> meet the definition of an investment.
>
> Additionally, investment interest expenses is ONLY deductible to the
> extent that you have investment income. So even if it qualified as
> investment interest he can only deduct the interest IF he BOTH had
> investment income and was able to itemize.
>
> You can check the IRS publications for a definition of Investment
> Interest - start with IRS Form 4952 I think.
>
> Gene E. Utterback, EA, RFC, ABA
>
property. The bank account doesn't even have to pay interest. The
interest expense on that debt is investment interest expense. To the
extent that you have investment income on the first page of the 1040,
you can deduct that interest.
--
Alan
http://taxtopics.net
Gene E. Utterback, EA, ABA
Jan 25, 2012, 1:07:29 PM1/25/12
to
"D. Stussy" wrote in message news:jfn342$4o6$1...@snarked.org...
"Gene E. Utterback, EA, ABA" <Ge...@AllianceTax.Com> wrote in message
news:jfmtce$msa$1...@dont-email.me...
Snipped to save bandwidth
>
> AFTER he actually buys the second home, he has:
> $200K acquisition debt on his main home - fully deductible on Schedule A;
> $150K of acquisition debt on he second home - fully deductible on
Schedule
> A;
> $0 excess equity debt - no deduction and no add backs for AMT.
> I disagree. The $150k with which he acquired the second home is actually
> AFTER he actually buys the second home, he has:
> $200K acquisition debt on his main home - fully deductible on Schedule A;
> $150K of acquisition debt on he second home - fully deductible on
Schedule
> A;
> $0 excess equity debt - no deduction and no add backs for AMT.
> debt secured by the first home, so NONE of it is acquisition debt. Your
> answer above under "until" (which matches my answer) remains as the answer
> for the "after" section too.
> You have to follow the IRS "tracing rules" for equity debt to see where it
> goes and how to report it.
As frequently happens, it looks like we have a disagreement between learned
professionals. This is one of the problems with all laws and regulations.
They are written by folks based on info available at the time and
interpreted much later by different folks based on a situation that wasn't
considered when written. Here's my take:
to deduct mortgage interest the loan must be secured by either your
first or second home
to deduct equity interest the loan proceeds must be BOTH secured by
either the first or second home AND the money must be used to either buy
or improve your home, or second home.
In the OPs case, he has currently has an equity loan that was NOT used to
buy or improve anything - hence only partially deductible and an add back
for AMT.
But IN MY OPINION, once he buys the new home - AND AS LONG AS HE HAS
SUFFICIENT EQUITY IN THE MORTGAGED HOME - he CAN deduct the interest in full
with no AMT issues.
In my opinion the trick here is that the proceeds are being used to BUY a
home that qualifies as a qualified residence, under the second home rules.
The TRAP I capitalized in the preceding sentence - he must retain sufficient
equity in the mortgaged property to deduct the interest.
And no, I cannot give you a hard citation to a code section, Treasury
Regulation, Revenue Regulation, Revenue Proc. or anything else that supports
this position. I will try to look and see what I can find, but it is tax
season - so don't hold your breath.
Alan
Jan 25, 2012, 1:17:09 PM1/25/12
to
On 1/24/12 8:20 PM, D. Stussy wrote:
> No, it's not. The new debt on a refinanced loan with respect to the first
> residence is secured by the first residence, not the second. To qualify as
> acquisition debt, the new debt with regard to the acquisition of the second
> residence must be secured by the second residence ONLY, not the first.
>
I have decided that you are correct as I can not find any other
authority to support my position... including one of my most trusted
advisors. Therefore, I will advise my friend to only borrow 100K over
the balance if he wants to refi. Otherwise, he should take out a
mortgage on the second home.
> No, it's not. The new debt on a refinanced loan with respect to the first
> residence is secured by the first residence, not the second. To qualify as
> acquisition debt, the new debt with regard to the acquisition of the second
> residence must be secured by the second residence ONLY, not the first.
>
I have decided that you are correct as I can not find any other
authority to support my position... including one of my most trusted
advisors. Therefore, I will advise my friend to only borrow 100K over
the balance if he wants to refi. Otherwise, he should take out a
mortgage on the second home.
removep...@yahoo.com
Jan 25, 2012, 3:02:06 PM1/25/12
to
On Jan 24, 7:20 pm, "D. Stussy" <spam+newsgro...@bde-arc.ampr.org>
wrote:
> > Here is the section you cite:
>
> > (B) Acquisition indebtedness
> > (i) In general The term “acquisition indebtedness” means any
> > indebtedness which—
> > (I) is incurred in acquiring, constructing, or substantially improving
> > any qualified residence of the taxpayer, and
> > (II) is secured by such residence.
> Dictionary: "such" adj. being the same as that which has been mentioned.
>
> This means that the debt must be secured by the same qualifying residence
> as that which was acquired or constructed, not the taxpayer's other
> qualifying residence (as a taxpayer, later in 163(h) can only have two -
> his principal residence and one other).
>From a grammatical point of view you are right. The house in clause
(I) is house2, and the (II) the debt is secured by house1, so
therefore it is not deductible.
However, when the issue boils down to a close reading of the grammar,
we must look at the underlying law. For example
http://fairmark.com/rothira/09030801-401k-basis.htm says, among other
things, that there may be a mismatch between the underlying law and
the statute as shown by this sentence "This is a problem because there
appears to be a mismatch between what Congress intended with this rule
and the language that appears in the law."
Thus we should look at the underlying law of this 163(h).
If Stussy is right, it means that the publication may be wrong -- ie.
it is too generous.
wrote:
> > Here is the section you cite:
>
> > (B) Acquisition indebtedness
> > (i) In general The term “acquisition indebtedness” means any
> > indebtedness which—
> > (I) is incurred in acquiring, constructing, or substantially improving
> > any qualified residence of the taxpayer, and
> > (II) is secured by such residence.
>
> This means that the debt must be secured by the same qualifying residence
> as that which was acquired or constructed, not the taxpayer's other
> qualifying residence (as a taxpayer, later in 163(h) can only have two -
> his principal residence and one other).
>From a grammatical point of view you are right. The house in clause
(I) is house2, and the (II) the debt is secured by house1, so
therefore it is not deductible.
However, when the issue boils down to a close reading of the grammar,
we must look at the underlying law. For example
http://fairmark.com/rothira/09030801-401k-basis.htm says, among other
things, that there may be a mismatch between the underlying law and
the statute as shown by this sentence "This is a problem because there
appears to be a mismatch between what Congress intended with this rule
and the language that appears in the law."
Thus we should look at the underlying law of this 163(h).
If Stussy is right, it means that the publication may be wrong -- ie.
it is too generous.
Alan
Jan 25, 2012, 3:09:37 PM1/25/12
to
On 1/25/12 11:07 AM, Gene E. Utterback, EA, ABA wrote:
>
>
> "D. Stussy" wrote in message news:jfn342$4o6$1...@snarked.org...
>
>
>
> "D. Stussy" wrote in message news:jfn342$4o6$1...@snarked.org...
>
> But IN MY OPINION, once he buys the new home - AND AS LONG AS HE HAS
> SUFFICIENT EQUITY IN THE MORTGAGED HOME - he CAN deduct the interest in
> full with no AMT issues.
>
> In my opinion the trick here is that the proceeds are being used to BUY
> a home that qualifies as a qualified residence, under the second home
> rules. The TRAP I capitalized in the preceding sentence - he must retain
> sufficient equity in the mortgaged property to deduct the interest.
>
> And no, I cannot give you a hard citation to a code section, Treasury
> Regulation, Revenue Regulation, Revenue Proc. or anything else that
> supports this position. I will try to look and see what I can find, but
> it is tax season - so don't hold your breath.
>
> Gene E. Utterback, EA, RFC, ABA
I posted a reply to one of D. Stussy's posts, that said as I can not
> SUFFICIENT EQUITY IN THE MORTGAGED HOME - he CAN deduct the interest in
> full with no AMT issues.
>
> In my opinion the trick here is that the proceeds are being used to BUY
> a home that qualifies as a qualified residence, under the second home
> rules. The TRAP I capitalized in the preceding sentence - he must retain
> sufficient equity in the mortgaged property to deduct the interest.
>
> And no, I cannot give you a hard citation to a code section, Treasury
> Regulation, Revenue Regulation, Revenue Proc. or anything else that
> supports this position. I will try to look and see what I can find, but
> it is tax season - so don't hold your breath.
>
> Gene E. Utterback, EA, RFC, ABA
find any authority to support my position, I defer to his position.
I.e., acquisition debt requires the debt to be secured by that home. Any
debt borrowed in a refi that exceeds the balance of the old debt can not
be acquisition debt unless it is used to improve the home that secures
the debt.
--
Alan
http://taxtopics.net
removep...@yahoo.com
Jan 25, 2012, 4:38:48 PM1/25/12
to
On Jan 25, 9:23 am, "Gene E. Utterback, EA, ABA"
it is held for investment, personal, or business reasons. I'm not
sure the law does this. The form 4952 has the instructions on it and
says
BEGIN QUOTE form 4952
Property held for investment. Property held
for investment includes property that
produces income, not derived in the ordinary
course of a trade or business, from interest,
dividends, annuities, or royalties. It also
includes property that produces gain or loss,
not derived in the ordinary course of a trade
or business, from the disposition of property
that produces these types of income or is
held for investment. However, it does not
include an interest in a passive activity.
END QUOTE
So the 150k sitting in a bank account is investment property. Does
the IRS care about the final use of this property? If yes, then any
investment is personal use, because your investments today will be
used later (even years from now) to buy a bigger house, buy bigger
cars, fancy travel, gifts for kids and grandkids, etc.
Suppose you do win the argument that the 150k had a purpose in the
near-future of buying a vacation home, which is personal use, thus
disqualifying the interest paid on this amount as investment use. Now
suppose the person was very rich, having over 500k lying around. So
they buy the vacation home using this other money and leave the 150k
in the bank account earning interest or buying stocks with it, while
writing off the interest on the 150k as investment interest. So
suddenly because they have multiple sources of income, it becomes
impossible to trace where the 300k to buy the vacation home came from,
and the rich person gets benefits not afforded to a poorer person.
This doesn't seem fair and seems to violate the 14th amendment.
> Additionally, investment interest expenses is ONLY deductible to the extent
> that you have investment income. So even if it qualified as investment
> interest he can only deduct the interest IF he BOTH had investment income
> and was able to itemize.
>
> You can check the IRS publications for a definition of Investment Interest -
> start with IRS Form 4952 I think.
The original post didn't say what else the person had, but if he had
1099-INT income, 1099-DIV income from other sources, that would make
the investment interest deductible to the amount of 1099-INT and 1099-
DIV income.
<G...@AllianceTax.Com> wrote:
> > Why can't the 50k be investment interest. For that matter, why not
> > the entire 150k be investment interest -- fully deductible on Schedule
> > A, no itemized deduction phaseout, no AMT? Is there a definition of
> > investment interest somewhere?
>
> Well, what was it INVESTED in? From what I read the money was parked in a
> bank account awaiting the purchase of a second home. This does NOT meet the
> definition of an investment.
You are looking at the final purpose of the money to determine whether
> > Why can't the 50k be investment interest. For that matter, why not
> > the entire 150k be investment interest -- fully deductible on Schedule
> > A, no itemized deduction phaseout, no AMT? Is there a definition of
> > investment interest somewhere?
>
> Well, what was it INVESTED in? From what I read the money was parked in a
> bank account awaiting the purchase of a second home. This does NOT meet the
> definition of an investment.
it is held for investment, personal, or business reasons. I'm not
sure the law does this. The form 4952 has the instructions on it and
says
BEGIN QUOTE form 4952
Property held for investment. Property held
for investment includes property that
produces income, not derived in the ordinary
course of a trade or business, from interest,
dividends, annuities, or royalties. It also
includes property that produces gain or loss,
not derived in the ordinary course of a trade
or business, from the disposition of property
that produces these types of income or is
held for investment. However, it does not
include an interest in a passive activity.
END QUOTE
So the 150k sitting in a bank account is investment property. Does
the IRS care about the final use of this property? If yes, then any
investment is personal use, because your investments today will be
used later (even years from now) to buy a bigger house, buy bigger
cars, fancy travel, gifts for kids and grandkids, etc.
Suppose you do win the argument that the 150k had a purpose in the
near-future of buying a vacation home, which is personal use, thus
disqualifying the interest paid on this amount as investment use. Now
suppose the person was very rich, having over 500k lying around. So
they buy the vacation home using this other money and leave the 150k
in the bank account earning interest or buying stocks with it, while
writing off the interest on the 150k as investment interest. So
suddenly because they have multiple sources of income, it becomes
impossible to trace where the 300k to buy the vacation home came from,
and the rich person gets benefits not afforded to a poorer person.
This doesn't seem fair and seems to violate the 14th amendment.
> Additionally, investment interest expenses is ONLY deductible to the extent
> that you have investment income. So even if it qualified as investment
> interest he can only deduct the interest IF he BOTH had investment income
> and was able to itemize.
>
> You can check the IRS publications for a definition of Investment Interest -
> start with IRS Form 4952 I think.
1099-INT income, 1099-DIV income from other sources, that would make
the investment interest deductible to the amount of 1099-INT and 1099-
DIV income.
Message has been deleted
Alan
Jan 25, 2012, 7:44:26 PM1/25/12
to
On 1/25/12 11:17 AM, Alan wrote:
> On 1/24/12 8:20 PM, D. Stussy wrote:
>> No, it's not. The new debt on a refinanced loan with respect to the first
>> residence is secured by the first residence, not the second. To
>> qualify as
>> acquisition debt, the new debt with regard to the acquisition of the
>> second
>> residence must be secured by the second residence ONLY, not the first.
>>
> I have decided that you are correct as I can not find any other
> authority to support my position... including one of my most trusted
> advisors. Therefore, I will advise my friend to only borrow 100K over
> the balance if he wants to refi. Otherwise, he should take out a
> mortgage on the second home.
>
I did find IRS Guidance that supports D. Stussy's position. It is buried
> On 1/24/12 8:20 PM, D. Stussy wrote:
>> No, it's not. The new debt on a refinanced loan with respect to the first
>> residence is secured by the first residence, not the second. To
>> qualify as
>> acquisition debt, the new debt with regard to the acquisition of the
>> second
>> residence must be secured by the second residence ONLY, not the first.
>>
> I have decided that you are correct as I can not find any other
> authority to support my position... including one of my most trusted
> advisors. Therefore, I will advise my friend to only borrow 100K over
> the balance if he wants to refi. Otherwise, he should take out a
> mortgage on the second home.
>
in IRS Notice 88-74.
TREATMENT OF DEBT WHICH IS PARTIALLY ACQUISITION INDEBTEDNESS AND
PARTIALLY HOME EQUITY INDEBTEDNESS
Regulations will provide that a single debt may qualify as partially
acquisition and partially home equity indebtedness. Therefore, for
example, if a taxpayer incurs a debt secured by his qualified residence
and uses a portion of the debt proceeds to refinance an existing
acquisition indebtedness and uses the remaining portion of the debt
proceeds for purposes other than the substantial improvement of the
residence, the portion of the debt used to refinance the acquisition
indebtedness will qualify as acquisition indebtedness and the portion of
the debt used for other purposes will generally qualify as home equity
indebtedness, subject to the $100,000 limitation on home equity
indebtedness.
Alan
Jan 25, 2012, 8:12:25 PM1/25/12
to
On 1/25/12 5:19 PM, D. Stussy wrote:
>
> My concern is that the parking of the money in the interest-bearing account
> was only a temporary event. Note that in another reply, I did NOT say that
> there wouldn't be any interest expense deduction but actually implied that
> there may be. I look at the reason that the debt was incurred in the first
> place, and that reason was to purchase real estate. If the reason for
> incurring the debt were to invest, then I'd be more willing to call it
> investment interest.
>
See Reg. 1.163-8T(c)(4). This is where you have to use the tracing
rules for determining what type of interest expense you have.
======================================================================
(4) Allocation of debt; proceeds deposited in borrower's account—(i)
Treatment of deposit. For purposes of this section, a deposit of debt
proceeds in an account is treated as an investment expenditure, and
amounts held in an account (whether or not interest bearing) are treated
as property held for investment. Debt allocated to an account under this
paragraph (c)(4)(i) must be reallocated as required by paragraph (j) of
this section whenever debt proceeds held in the account are used for
another expenditure. This paragraph (c)(4) provides rules for
determining when debt proceeds are expended from the account.
======================================================================
Until you do something else with the proceeds, the bank deposit is
considered investment property and any interest expense you incur is
investment interest expense. It doesn't matter what your original
intent was for use of the debt proceeds. It remains investment property
as long as the funds remain in the account.
--
Alan
http://taxtopics.net
>
> My concern is that the parking of the money in the interest-bearing account
> was only a temporary event. Note that in another reply, I did NOT say that
> there wouldn't be any interest expense deduction but actually implied that
> there may be. I look at the reason that the debt was incurred in the first
> place, and that reason was to purchase real estate. If the reason for
> incurring the debt were to invest, then I'd be more willing to call it
> investment interest.
>
See Reg. 1.163-8T(c)(4). This is where you have to use the tracing
rules for determining what type of interest expense you have.
======================================================================
(4) Allocation of debt; proceeds deposited in borrower's account—(i)
Treatment of deposit. For purposes of this section, a deposit of debt
proceeds in an account is treated as an investment expenditure, and
amounts held in an account (whether or not interest bearing) are treated
as property held for investment. Debt allocated to an account under this
paragraph (c)(4)(i) must be reallocated as required by paragraph (j) of
this section whenever debt proceeds held in the account are used for
another expenditure. This paragraph (c)(4) provides rules for
determining when debt proceeds are expended from the account.
======================================================================
Until you do something else with the proceeds, the bank deposit is
considered investment property and any interest expense you incur is
investment interest expense. It doesn't matter what your original
intent was for use of the debt proceeds. It remains investment property
as long as the funds remain in the account.
--
Alan
http://taxtopics.net
Message has been deleted
Alan
Jan 26, 2012, 12:50:20 PM1/26/12
to
> news:jfq99l$gpu$1...@dont-email.me...
> Right, but if you take that at face value, you've also reclassifed the
> equity part of the debt as investment interest, meaning that the interest
> on the equity debt portion is not deductible if there's no portfolio income
> to offset it. I don't think we want to go that far, thus leaving only the
> $50k which is not acquisition debt and exceeds the equity debt limit (of
> $100k) as subject to the investment interest rules as interest on equity
> debt is otherwise deductible regardless of how it's used.
>
I'm not in disagreement. I am merely saying bank accounts are investment
property and interest you pay on the debt that created the bank account
will count as investment interest expense unless you have the option to
treat it as something else and you elect to treat it as something else.
E.g., the cash from a refi can be deposited into a bank account and if
you have not already reached your $100K limit of home equity debt, you
can treat up to $100K of the bank deposit as HE debt and the balance
would be investment property debt.
> equity part of the debt as investment interest, meaning that the interest
> on the equity debt portion is not deductible if there's no portfolio income
> to offset it. I don't think we want to go that far, thus leaving only the
> $50k which is not acquisition debt and exceeds the equity debt limit (of
> $100k) as subject to the investment interest rules as interest on equity
> debt is otherwise deductible regardless of how it's used.
>
I'm not in disagreement. I am merely saying bank accounts are investment
property and interest you pay on the debt that created the bank account
will count as investment interest expense unless you have the option to
treat it as something else and you elect to treat it as something else.
E.g., the cash from a refi can be deposited into a bank account and if
you have not already reached your $100K limit of home equity debt, you
can treat up to $100K of the bank deposit as HE debt and the balance
would be investment property debt.
removep...@yahoo.com
Jan 26, 2012, 8:55:48 PM1/26/12
to
On Jan 26, 9:50 am, Alan <tempu...@vacationmail.com> wrote:
> > Right, but if you take that at face value, you've also reclassifed the
> > equity part of the debt as investment interest, meaning that the interest
> > on the equity debt portion is not deductible if there's no portfolio income
> > to offset it. I don't think we want to go that far, thus leaving only the
> > $50k which is not acquisition debt and exceeds the equity debt limit (of
> > $100k) as subject to the investment interest rules as interest on equity
> > debt is otherwise deductible regardless of how it's used.
>
> I'm not in disagreement. I am merely saying bank accounts are investment
> property and interest you pay on the debt that created the bank account
> will count as investment interest expense unless you have the option to
> treat it as something else and you elect to treat it as something else.
> E.g., the cash from a refi can be deposited into a bank account and if
> you have not already reached your $100K limit of home equity debt, you
> can treat up to $100K of the bank deposit as HE debt and the balance
> would be investment property debt.
Suppose there was just 100k of debt instead of 150k. Can you elect to
> > Right, but if you take that at face value, you've also reclassifed the
> > equity part of the debt as investment interest, meaning that the interest
> > on the equity debt portion is not deductible if there's no portfolio income
> > to offset it. I don't think we want to go that far, thus leaving only the
> > $50k which is not acquisition debt and exceeds the equity debt limit (of
> > $100k) as subject to the investment interest rules as interest on equity
> > debt is otherwise deductible regardless of how it's used.
>
> I'm not in disagreement. I am merely saying bank accounts are investment
> property and interest you pay on the debt that created the bank account
> will count as investment interest expense unless you have the option to
> treat it as something else and you elect to treat it as something else.
> E.g., the cash from a refi can be deposited into a bank account and if
> you have not already reached your $100K limit of home equity debt, you
> can treat up to $100K of the bank deposit as HE debt and the balance
> would be investment property debt.
deduct the debt as either HELOC debt or investment interest? HELOC
interest is great because you can deduct interest on the full 100k,
but if you're in AMT and/or have lots of investment interest (1099-
INT, non-qualified 1099-DIV, short term capital gains) then investment
interest is better.
Alan
Jan 27, 2012, 1:12:11 PM1/27/12
to
On 1/26/12 6:55 PM, removep...@yahoo.com wrote:
> On Jan 26, 9:50 am, Alan<tempu...@vacationmail.com> wrote:
>
>>> Right, but if you take that at face value, you've also reclassifed the
>>> equity part of the debt as investment interest, meaning that the interest
>>> on the equity debt portion is not deductible if there's no portfolio income
>>> to offset it. I don't think we want to go that far, thus leaving only the
>>> $50k which is not acquisition debt and exceeds the equity debt limit (of
>>> $100k) as subject to the investment interest rules as interest on equity
>>> debt is otherwise deductible regardless of how it's used.
>>
>> I'm not in disagreement. I am merely saying bank accounts are investment
>> property and interest you pay on the debt that created the bank account
>> will count as investment interest expense unless you have the option to
>> treat it as something else and you elect to treat it as something else.
>> E.g., the cash from a refi can be deposited into a bank account and if
>> you have not already reached your $100K limit of home equity debt, you
>> can treat up to $100K of the bank deposit as HE debt and the balance
>> would be investment property debt.
>
> Suppose there was just 100k of debt instead of 150k. Can you elect to
> deduct the debt as either HELOC debt or investment interest? HELOC
> interest is great because you can deduct interest on the full 100k,
> but if you're in AMT and/or have lots of investment interest (1099-
> INT, non-qualified 1099-DIV, short term capital gains) then investment
> interest is better.
>
Good question for which I am not sure. However, IRC 163(d)(3)(B) says
> On Jan 26, 9:50 am, Alan<tempu...@vacationmail.com> wrote:
>
>>> Right, but if you take that at face value, you've also reclassifed the
>>> equity part of the debt as investment interest, meaning that the interest
>>> on the equity debt portion is not deductible if there's no portfolio income
>>> to offset it. I don't think we want to go that far, thus leaving only the
>>> $50k which is not acquisition debt and exceeds the equity debt limit (of
>>> $100k) as subject to the investment interest rules as interest on equity
>>> debt is otherwise deductible regardless of how it's used.
>>
>> I'm not in disagreement. I am merely saying bank accounts are investment
>> property and interest you pay on the debt that created the bank account
>> will count as investment interest expense unless you have the option to
>> treat it as something else and you elect to treat it as something else.
>> E.g., the cash from a refi can be deposited into a bank account and if
>> you have not already reached your $100K limit of home equity debt, you
>> can treat up to $100K of the bank deposit as HE debt and the balance
>> would be investment property debt.
>
> Suppose there was just 100k of debt instead of 150k. Can you elect to
> deduct the debt as either HELOC debt or investment interest? HELOC
> interest is great because you can deduct interest on the full 100k,
> but if you're in AMT and/or have lots of investment interest (1099-
> INT, non-qualified 1099-DIV, short term capital gains) then investment
> interest is better.
>
that investment interest does not include qualified residence interest
as defined in 163(h)(3). That section includes both acquisition and home
equity debt as qualified residence interest. I most conclude that if you
have a secured loan that meets the definition of HE debt, then
depositing the funds in the bank does not change its character. It is HE
debt. I do know, that if you withdraw some funds and spend it on
capital improvements for the property that secures the loan, that amount
gets converted to acquisition debt. I must assume therefore, that if you
withdraw some of the money and spend it to fit up your business, you
have converted that portion to business interest. Any amount that still
remains in the account would continue to be HE debt and not investment debt.
--
Alan
http://taxtopics.net
Seth
Feb 1, 2012, 10:33:37 PM2/1/12
to
In article <jfl7a5$8bh$1...@dont-email.me>,
Seth
Alan <temp...@vacationmail.com> wrote:
>The interest rate on current loan is 5.75%. He can refi at 3.9%. Better
>to have a 350K loan at 3.9% then a 200K loan @ 5.75% and a 150K @ 3.9%.
For one day, then he refis the 200K loan @ 3.9%.
>The interest rate on current loan is 5.75%. He can refi at 3.9%. Better
>to have a 350K loan at 3.9% then a 200K loan @ 5.75% and a 150K @ 3.9%.
Seth
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