Mortgage Interest Limitation
Maria M.
of acquisition debt and $100k of homeowner's equity debt. I purchased
a second home this year and have mortgage acquisition debt of about
$1.3M between my personal and vacation home. My accountant tells me
that even though the rules are what they are, the IRS has in several
instances allowed interest on up to $1.1M in acquisition debt. She
even showed me a write up where RIA states that the IRS is allowing
interest on up to $1.1M of acquisition debt to be deductible. Has
anyone encountered this situation or read anything about it?
Thanks.
--
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Alan
> The rules say that mortgage interest is only deductible on at most $1M
> of acquisition debt and $100k of homeowner's equity debt. I purchased
> a second home this year and have mortgage acquisition debt of about
> $1.3M between my personal and vacation home. My accountant tells me
> that even though the rules are what they are, the IRS has in several
> instances allowed interest on up to $1.1M in acquisition debt. She
> even showed me a write up where RIA states that the IRS is allowing
> interest on up to $1.1M of acquisition debt to be deductible. Has
> anyone encountered this situation or read anything about it?
>
> Thanks.
>
the excess above $1M as home equity debt. The maximum is still
$1.1M but you don't have to actually have a home equity loan. The
fair market value limitation still exists.
Alan
> On 2/25/10 7:47 AM, Maria M. wrote:
>> The rules say that mortgage interest is only deductible on at most $1M
>> of acquisition debt and $100k of homeowner's equity debt. I purchased
>> a second home this year and have mortgage acquisition debt of about
>> $1.3M between my personal and vacation home. My accountant tells me
>> that even though the rules are what they are, the IRS has in several
>> instances allowed interest on up to $1.1M in acquisition debt. She
>> even showed me a write up where RIA states that the IRS is allowing
>> interest on up to $1.1M of acquisition debt to be deductible. Has
>> anyone encountered this situation or read anything about it?
>>
>> Thanks.
>>
> In ILM 200940030, the IRS says you can now treat up to $100K of the
> excess above $1M as home equity debt. The maximum is still $1.1M but you
> don't have to actually have a home equity loan. The fair market value
> limitation still exists.
>
http://www.irs.gov/pub/irs-wd/0940030.pdf
In addition, this position was 180 degrees different than prior
tax court decisions. Here's an excerpt from the memorandum:
We recognize that the position taken in this memorandum is
inconsistent with Pau v. Commissioner, T.C. Memo. 1997-43 and
Catalano v. Commissioner, T.C. Memo. 2000-82, regarding the
definition of acquisition indebtedness in � 163(h)(3)(B).
However, we believe that the position in this memorandum is the
better interpretation of �163(h)(3)(B) and (C).
Gene E. Utterback, EA, RFC, ABA
news:4ecf8897-ee2f-4347...@z11g2000yqz.googlegroups.com...
> The rules say that mortgage interest is only deductible on at most $1M
> of acquisition debt and $100k of homeowner's equity debt. I purchased
> a second home this year and have mortgage acquisition debt of about
> $1.3M between my personal and vacation home. My accountant tells me
> that even though the rules are what they are, the IRS has in several
> instances allowed interest on up to $1.1M in acquisition debt. She
> even showed me a write up where RIA states that the IRS is allowing
> interest on up to $1.1M of acquisition debt to be deductible. Has
> anyone encountered this situation or read anything about it?
>
> Thanks.
Yes, I've both read and encountered the situation. BUT I do not think is
your real question. Tell us what your real question is and we'll try to
answer it.
Gene E. Utterback, EA, RFC, ABA
Maria M.
<g...@alliancetax.com> wrote:
> "Maria M." <rjmali...@aol.com> wrote in message
>
> news:4ecf8897-ee2f-4347...@z11g2000yqz.googlegroups.com...
>
> > The rules say that mortgage interest is only deductible on at most $1M
> > of acquisition debt and $100k of homeowner's equity debt. �I purchased
> > a second home this year and have mortgage acquisition debt of about
> > $1.3M between my personal and vacation home. �My accountant tells me
> > that even though the rules are what they are, the IRS has in several
> > instances allowed interest on up to $1.1M in acquisition debt. �She
> > even showed me a write up where RIA states that the IRS is allowing
> > interest on up to $1.1M of acquisition debt to be deductible. �Has
> > anyone encountered this situation or read anything about it?
>
> > Thanks.
>
> Yes, I've both read and encountered the situation. �BUT I do not think is
> your real question. �Tell us what your real question is and we'll try to
> answer it.
>
> Gene E. Utterback, EA, RFC, ABA
Thanks for your answers. My real question is whether in my tax return
I should attempt to deduct interest on $1.1M of acquistion debt or cap
the interest at interest on the first $1M since I don't have any home
equity debt.
removep...@yahoo.com
> On 2/25/10 7:47 AM, Maria M. wrote:> The rules say that mortgage interest is only deductible on at most $1M
> > of acquisition debt and $100k of homeowner's equity debt. I purchased
> > a second home this year and have mortgage acquisition debt of about
> > $1.3M between my personal and vacation home. My accountant tells me
> > that even though the rules are what they are, the IRS has in several
> > instances allowed interest on up to $1.1M in acquisition debt. She
> > even showed me a write up where RIA states that the IRS is allowing
> > interest on up to $1.1M of acquisition debt to be deductible. Has
> > anyone encountered this situation or read anything about it?
>
> > Thanks.
>
> In ILM 200940030, the IRS says you can now treat up to $100K of
> the excess above $1M as home equity debt. The maximum is still
> $1.1M but you don't have to actually have a home equity loan. The
> fair market value limitation still exists.
Is it possible to deduct mortgage interest on the 2nd home as
investment interest (subject to investment income of course)? If yes,
what requirements does the second home have to satisfy in order to be
treated as investment interest?
Alan
> On Feb 25, 12:20 pm, "Gene E. Utterback, EA, RFC, ABA"
> <g...@alliancetax.com> wrote:
>> "Maria M."<rjmali...@aol.com> wrote in message
>>
>> news:4ecf8897-ee2f-4347...@z11g2000yqz.googlegroups.com...
>>
>>> The rules say that mortgage interest is only deductible on at most $1M
>>> of acquisition debt and $100k of homeowner's equity debt. I purchased
>>> a second home this year and have mortgage acquisition debt of about
>>> $1.3M between my personal and vacation home. My accountant tells me
>>> that even though the rules are what they are, the IRS has in several
>>> instances allowed interest on up to $1.1M in acquisition debt. She
>>> even showed me a write up where RIA states that the IRS is allowing
>>> interest on up to $1.1M of acquisition debt to be deductible. Has
>>> anyone encountered this situation or read anything about it?
>>
>>> Thanks.
>>
>> Yes, I've both read and encountered the situation. BUT I do not think is
>> your real question. Tell us what your real question is and we'll try to
>> answer it.
>>
>> Gene E. Utterback, EA, RFC, ABA
>
> Thanks for your answers. My real question is whether in my tax return
> I should attempt to deduct interest on $1.1M of acquistion debt or cap
> the interest at interest on the first $1M since I don't have any home
> equity debt.
>
treat $100,000 of your acquisition debt as home equity debt. As
such, if you so desire, you can deduct interest you paid on $1.1M
of acquisition debt.
Gene E. Utterback, EA, RFC, ABA
> On Feb 25, 12:20 pm, "Gene E. Utterback, EA, RFC, ABA"
> <g...@alliancetax.com> wrote:
>> "Maria M." <rjmali...@aol.com> wrote in message
>>
>> news:4ecf8897-ee2f-4347...@z11g2000yqz.googlegroups.com...
>>
>> > The rules say that mortgage interest is only deductible on at most $1M
>> > of acquisition debt and $100k of homeowner's equity debt. I purchased
>> > a second home this year and have mortgage acquisition debt of about
>> > $1.3M between my personal and vacation home. My accountant tells me
>> > that even though the rules are what they are, the IRS has in several
>> > instances allowed interest on up to $1.1M in acquisition debt. She
>> > even showed me a write up where RIA states that the IRS is allowing
>> > interest on up to $1.1M of acquisition debt to be deductible. Has
>> > anyone encountered this situation or read anything about it?
>>
>> > Thanks.
>>
>> Yes, I've both read and encountered the situation. BUT I do not think is
>> your real question. Tell us what your real question is and we'll try to
>> answer it.
>>
>> Gene E. Utterback, EA, RFC, ABA
>
> Thanks for your answers. My real question is whether in my tax return
> I should attempt to deduct interest on $1.1M of acquistion debt or cap
> the interest at interest on the first $1M since I don't have any home
> equity debt.
Maria - in YOUR case, you can elect to treat $100K as acquisition related
equity debt and you CAN deduct the interest on $1.1M in loans.
You should also be aware that this amount will decrease annually. You'll
need to maintain some sort of ledger to track the debt and you'll need to
adjust down your deduction annually - many non pros get lost with this so
I'll try to give you an example.
Say your mortgage was really for $1.3M;
You can deduct the interest on $1.1M - this represents 84.615% of your total
debt.
So you can deduct ONLY 84.615% of your mortgage interest.
A few years will pass and you'll pay down the mortgage to the point where
the remaining balance is say $800K (that's all that's left from the original
$1.3M) you still get to deduct ONLY 84.615% of the interest on this loan.
Just because the loan balance is NOW below the $1.1M threshold doesn't mean
you can deduct all of the interest.
AND if you refi or take out an equity mortgage at this POINT you'd only be
able to deduct the interest on the FIRST $100K of new money.
AND unless you used that $100K to improve the home, you'd have a tax
adjustment item for AMT purposes.
Hope this helps,
Gene E. Utterback, EA, RFC, ABA
--
Dan Lanciani
In article <hm6uhj$o9k$1...@news.eternal-september.org>, ge...@alliancetax.com (Gene E. Utterback, EA, RFC, ABA) writes:
| Say your mortgage was really for $1.3M;
| You can deduct the interest on $1.1M - this represents 84.615% of your total
| debt.
| So you can deduct ONLY 84.615% of your mortgage interest.
|
| A few years will pass and you'll pay down the mortgage to the point where
| the remaining balance is say $800K (that's all that's left from the original
| $1.3M) you still get to deduct ONLY 84.615% of the interest on this loan.
| Just because the loan balance is NOW below the $1.1M threshold doesn't mean
| you can deduct all of the interest.
Interesting. I've sometimes considered the notion of using a temporarily
larger mortgage to compensate for a temporary cash flow shortage. It
sounds like you could shoot yourself in the foot doing this. Consider
an example to see if I am understanding correctly. Ignore the extra $100k
possibility.
You get a $2M mortgage for a home purchase knowing that soon you will have
$1M to pay it down. Say you have some bonds coming due or are getting a
bonus or maybe you are even about to close on the sale of another house but
you can't quite do it in time. A few months later you do indeed get your
$1M and pay down the $2M mortgage to $1M. Does this mean that for the rest
of the life of the mortgage you are restricted to deducting only 50% of the
mortgage interest?
Dan Lanciani
ddl@danlan.*com
Bill Brown
gro...@yahoo.com> wrote:
>
> Is it possible to deduct mortgage interest on the 2nd home as
> investment interest (subject to investment income of course)? �If yes,
> what requirements does the second home have to satisfy in order to be
> treated as investment interest?
>
No.
D. Stussy
news:135...@news.IPSWITCH.COM...
Yes, under the original interpretation. Under the interpretation from the
CCMemo, you get 55% (50% as $1M acq. and 5% as the $100k equity debt).
Bill Brown
>
> Thanks for your answers. �My real question is whether in my tax return
> I should attempt to deduct interest on $1.1M of acquistion debt or cap
> the interest at interest on the first $1M since I don't have any home
> equity debt.
Alan answered your question in his first response.
D. Stussy
news:hm6uhj$o9k$1...@news.eternal-september.org...
I don't see where that interpretation is coming from. The amount of debt
is always referred to as the original amount borrowed, not the balance
remaining. The refinance characterization rule at Section 163(h)(3)(B)
tells us this.
Even if it weren't, I'd say that the OPPOSITE effect results: As a
taxpayer pays in, he accumulates equity, so before the additional $100k of
equity debt related interest deduction may apply, there first must be $100k
of equity. (There are some people in the "junk loan" market who got a
second mortgage to satisfy the down-payment requirements at purchase of the
first mortgage -- but granted those generally weren't for $1M+ homes.)
I also note that the IRS document appears to be a change in position, even
without regard to the Tax Court decisions cited, as those cases were
[previously] consistent with the prior position as the IRS internally
taught its personnel after the TRA'86 changes.
Does anyone know if this interpretation applies to years before its release
date? If so, time to get the amended returns for 2006 cranking before the
deadline....
Arthur Kamlet
And only $1million would be allowable under AMT, although I think
someone mentioned that already.
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
Bill Brown
acquisition indebtedness, $100,000 is equity indebtedness and $200,000
is personal indebtedness. Principal payments by the debtor first
reduce the personal indebtedness. When that reaches zero, equity
indebtedness is reduced. When the equity indebtedness balance reaches
zero, payments reduce acquisition indebtedness.
removep...@yahoo.com
<g...@alliancetax.com> wrote:
> You should also be aware that this amount will decrease annually. �You'll
> need to maintain some sort of ledger to track the debt and you'll need to
> adjust down your deduction annually - many non pros get lost with this so
> I'll try to give you an example.
>
> Say your mortgage was really for $1.3M;
> You can deduct the interest on $1.1M - this represents 84.615% of your total
> debt.
> So you can deduct ONLY 84.615% of your mortgage interest.
>
> A few years will pass and you'll pay down the mortgage to the point where
> the remaining balance is say $800K (that's all that's left fromthe original
> $1.3M) you still get to deduct ONLY 84.615% of the interest on this loan.
> Just because the loan balance is NOW below the $1.1M threshold doesn't mean
> you can deduct all of the interest.
Which part of publication 936 mentions this rule?
removep...@yahoo.com
> In article <hm6j0a$in...@news.eternal-september.org>,
> >Under the legal memorandum issued by the IRS, you may elect to
> >treat $100,000 of your acquisition debt as home equity debt. As
> >such, if you so desire, you can deduct interest you paid on $1.1M
> >of acquisition debt.
>
> And only $1million would be allowable under AMT, although I think
> someone mentioned that already.
The instructions to form 6251 allow the 100k if it is used to acquire,
build, improve your home.
Arthur Kamlet
removep...@yahoo.com <removep...@yahoo.com> wrote:
>On Feb 25, 8:19�pm, kam...@panix.com (Arthur Kamlet) wrote:
>> In article <hm6j0a$in...@news.eternal-september.org>,
>
>> >Under the legal memorandum issued by the IRS, you may elect to
>> >treat $100,000 of your acquisition debt as home equity debt. As
>> >such, if you so desire, you can deduct interest you paid on $1.1M
>> >of acquisition debt.
>>
>> And only $1million would be allowable under AMT, although I think
>> someone mentioned that already.
>
>The instructions to form 6251 allow the 100k if it is used to acquire,
>build, improve your home.
The portionof excess acquisition debt is now treated as HE debt.
Are you saying that when there is debt exceeding 1 million, the first
100,000 above that million is not treated as home equity debt for
AMT if it was used to buy build or improve? And that the AMT instructions
say that?
There are two rules, and when they conflict, which trumps which?
Rule 1: HE Debt is treated as Acq Debt if used to buy build or improve.
And that allows HE Debt to be relabeled and treated as
Acq debt even fo AMT.
Rule 2. When Acq Debt exceeds 1million, the first 100,000 above this
amount is treated as Home Equity Debt even if used to BB or i.
I believe when these two rules seem to conflict, rule 2 trumps rule 1.
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
--
Bill Brown
>
relevant to this issue fails to appear in Publication 936 means that
the publication is incomplete, not that the rule is wrong. Gene
Utterback is correct.
If your only access to tax law is IRS publications then you have too
little access to be offering tax advice or other tax services, in my
opinion.
Stuart A. Bronstein
> "removeps-gro...@yahoo.com" <removeps-gro...@yahoo.com> wrote:
>>
>> Which part of publication 936 mentions this rule?
>>
> Publication 936 is not the final authority on anything. That a
> rule relevant to this issue fails to appear in Publication 936
> means that the publication is incomplete, not that the rule is
> wrong. Gene Utterback is correct.
Actually I'm not so sure. That position seems to be a reasonable
extrapolation from the rule that a refinance can't increase the
amount (or proportion) of debt qualifying for the interest
deduction.
But the statute doesn't say the same thing with respect to the
amount the original loan exceeds $1,000,000. It says, first, "The
term 'qualified residence interest' means any interest which is
paid or accrued during the taxable year..." on a proper debt. Note
the word "any."
It goes on to say, "The aggregate amount treated as acquisition
indebtedness for any period shall not exceed $1,000,000 ($500,000
in the case of a married individual filing a separate return)."
It doesn't say the deduction is limited to the portion of the debt
originally allowed the deduction. I was unable to find any
regulation on this point.
Personally it looks like the statute allows the full deduction if a
loan that started out at over $1,000,000 goes down, the deduction
on the full $1,000,000 is allowed to the extent the loan remains
that high.
> If your only access to tax law is IRS publications then you have
> too little access to be offering tax advice or other tax
> services, in my opinion.
I'll certainly agree with that.
--
Stu
http://downtoearthlawyer.com
Mark Bole
> Of the entire $1,300,000 balance described in the OP, $1,000,000 is
> acquisition indebtedness, $100,000 is equity indebtedness and $200,000
> is personal indebtedness. Principal payments by the debtor first
> reduce the personal indebtedness. When that reaches zero, equity
> indebtedness is reduced. When the equity indebtedness balance reaches
> zero, payments reduce acquisition indebtedness.
>
That rule *is* in Pub 936. IRS pubs are not final authority, nor should
they be dismissed out-of-hand. Also, the full $300K, if secured by a
qualified home, is defined as home equity debt, whether the interest on
it is deductible or not.
From the pub:
"Mixed-use mortgages. [...] Principal payments on a mixed-use mortgage
are applied in full to each category of debt, until its balance is zero,
in the following order:
1. First, any home equity debt,
2. Next, any grandfathered debt, and
3. Finally, any home acquisition debt."
-Mark Bole
removep...@yahoo.com
> On Feb 25, 11:28 pm, "removeps-gro...@yahoo.com" <removeps-gro...@yahoo.com> wrote:
> > Which part of publication 936 mentions this rule?
>
> Publication 936 is not the final authority on anything. That a rule
> relevant to this issue fails to appear in Publication 936 means that
> the publication is incomplete, not that the rule is wrong. Gene
> Utterback is correct.
>
> If your only access to tax law is IRS publications then you have too
> little access to be offering tax advice or other tax services, in my
> opinion.
Then is there a revenue ruling, statute, or something. Can you point
me to it please?
removep...@yahoo.com
> >> And only $1million would be allowable under AMT, although I think
> >> someone mentioned that already.
>
> >The instructions to form 6251 allow the 100k if it is used to acquire,
> >build, improve your home.
>
> The portion of excess acquisition debt is now treated as HE debt.
>
> Are you saying that when there is debt exceeding 1 million, the first
> 100,000 above that million is not treated as home equity debt for
> AMT if it was used to buy build or improve? And that the AMT instructions
> say that?
Home Mortgage Interest Adjustment Worksheet�Line 4
1. Enter the total of the home mortgage interest you deducted on
lines 10 through 12 of Schedule A (Form 1040) and any qualified
mortgage insurance premiums you deducted on line 13 of Schedule A
(Form 1040) 1.
2. Enter the part, if any, of the interest included on line 1 above
that was paid on an eligible mortgage (defined on this page). Include
any qualified mortgage insurance premiums included on line 1 above
that were paid in connection with an eligible mortgage 2.
Line 1 will be the interest on $1.1 million. Is that right?
Line 2 will be the same as line 1.
Eventually, line 6, the part of mortgage interest not allowed under
AMT, will be zero.
Eligible mortgage. An eligible mortgage is a mortgage whose proceeds
were used to buy, build, or substantially improve your main home or a
second home that is a qualified dwelling. A mortgage whose proceeds
were used to refinance another mortgage is not an eligible mortgage.
Of course, the above is a simplistic interpretation of the
instructions, which may or may not be correct.
> There are two rules, and when they conflict, which trumps which?
>
> Rule 1: � HE Debt is treated as Acq Debt if used to buy build or improve.
> � � � � � And that allows HE Debt to be relabeled and treated as
> � � � � � Acq debt even fo AMT.
>
> Rule 2. � When Acq Debt exceeds 1million, the first 100,000 above this
> � � � � � amount is treated as Home Equity Debt even if used to BB or i.
>
> I believe when these two rules seem to conflict, rule 2 trumps rule 1.
That could be the IRS's position, and they usually win in tax court.
Alan
> On Feb 25, 2:45 pm, "Gene E. Utterback, EA, RFC, ABA"
> <g...@alliancetax.com> wrote:
>
>> You should also be aware that this amount will decrease annually. You'll
>> need to maintain some sort of ledger to track the debt and you'll need to
>> adjust down your deduction annually - many non pros get lost with this so
>> I'll try to give you an example.
>>
>> Say your mortgage was really for $1.3M;
>> You can deduct the interest on $1.1M - this represents 84.615% of your total
>> debt.
>> So you can deduct ONLY 84.615% of your mortgage interest.
>>
>> A few years will pass and you'll pay down the mortgage to the point where
>> the remaining balance is say $800K (that's all that's left fromthe original
>> $1.3M) you still get to deduct ONLY 84.615% of the interest on this loan.
>> Just because the loan balance is NOW below the $1.1M threshold doesn't mean
>> you can deduct all of the interest.
>
> Which part of publication 936 mentions this rule?
>
It will continue to rise until such time that the qualified loan
limit (assuming no grandfathered debt for this example) of either
$1.0M or 1.1M with HE debt and the average balance on all the
debt on qualified homes for the year is also the same number. At
that point all interest is deductible because the loan limit
divided by the average balance of all qualified debt = 1.0. The
best example of this is to use Table 1 on page 11 of Pub 936.
This worksheet is a correct interpretation of the law. Enter a
set of numbers for this year that are in excess of $1.1M and
compute the percentage deductible. Then assume some payoff of
principal with a new balance that is still over the limit for the
next tax year. You will see that the percentage deductible goes up.
Bear in mind that you have to use average loan balances. The IRS
offers a variety of different methods for computing the average
loan balance for any given year.
D. Stussy
news:hma6dh$7nt$1...@news.eternal-september.org...
WRONG! The amount borrowed remains constant over the life of the loan.
It is NOT adjusted by the amount repaid. The percentage of allowable
interest is computed ONCE and applied to all years until paid off or
refinancing (for more than the remaining balance) occurs.
Seth
D. Stussy <rep...@newsgroups.kd6lvw.ampr.org> wrote:
>WRONG! The amount borrowed remains constant over the life of the loan.
>It is NOT adjusted by the amount repaid. The percentage of allowable
>interest is computed ONCE and applied to all years until paid off or
>refinancing (for more than the remaining balance) occurs.
So if someone gets a $2 million mortgage, and 2 months later repays $1
million, you say the interest subsequent to that is only 50%
deductible? Yet if he refinances, it suddenly becomes 100%
deductible? That makes less sense than tax law usually does.
So I went to the source.
In the definition of "acquisition indebtedness"
TITLE 26 > Subtitle A > CHAPTER 1 > Subchapter B > PART VI > Section 163
(h) (3) (B) (ii) $1,000,000 limitation The aggregate amount treated as
acquisition indebtedness for any period shall not exceed $1,000,000
($500,000 in the case of a married individual filing a separate
return).
That indicates to me that in year 2, when the total balance is under
$1,000,000, it's all acquisition indebtedness. I saw nothing
referring to the original amount of the debt, other than in relation
to the grandfather clause (for mortgage debt prior to October 13,
1987).
Seth
Arthur Rubin
wrote:
> "Alan" <sfcnm-...@yahoo.com> wrote in message
> WRONG! � The amount borrowed remains constant over the life of the loan.
> It is NOT adjusted by the amount repaid. �The percentage of allowable
> interest is computed ONCE and applied to all years until paid off or
> refinancing (for more than the remaining balance) occurs.
That doesn't seem consistent with the law or regulations. I think the
Pub 936 instructions seem closer to the law than the "constant
percentage" interpretation.
--
Arthur L. Rubin
Harry B.
loan.
It is NOT adjusted by the amount repaid. The percentage of allowable
interest is computed ONCE and applied to all years until paid off or
refinancing (for more than the remaining balance) occurs."<<
I can't agree with what you've proposed here. Can you cite an
authoritative resource that supports your notion that each year's
"qualifying" balance of a home mortgage is computed by taking a
percentage of the original balance?
Alan
clear to you. The worksheets in Pub 936 are consistent with the
regulations in 1.163. They both clearly state that for any tax
year, you enter the average balance of all of your home
acquisition debt for that year! That's why Table 1 has you enter
the balance on Line 2 and compares it to the $1,000,000 limit on
Line 3 (let's assume for this exercise there is no grandfathered
or home equity debt). If you have no grandfathered debt and home
equity debt, your qualified loan limit will be $1M (Line 8 of the
Table). In computing how much of your interest is deductible, you
enter the average balance of all mortgages on all qualified homes
for the current year! This is very explicitly stated in the Line
9 instructions for the table. It is also consistent with the Regs
that tell you how to compute your annual average balance. If you
have a mortgage that is not interest only, and you don't
refinance, then this average balance is going to go down each
year as you pay off principal. As this number is the denominator
of the formula, and the $1M limit is the numerator, the
percentage allowed to deduct will go up each year. The Regs tell
you how you go about computing the average balance for each year.
Using your interpretation, there would be no need for an annual
worksheet. There would be no need to compute average balance.
Stuart A. Bronstein
> D. Stussy wrote:
>> WRONG! The amount borrowed remains constant over the life of
>> the loan. It is NOT adjusted by the amount repaid. The
>> percentage of allowable interest is computed ONCE and applied
>> to all years until paid off or refinancing (for more than the
>> remaining balance) occurs.
>>
> I am totally flabbergasted that what is so clear to me is not
> clear to you. The worksheets in Pub 936 are consistent with the
> regulations in 1.163. They both clearly state that for any tax
> year, you enter the average balance of all of your home
> acquisition debt for that year! That's why Table 1 has you enter
> the balance on Line 2 and compares it to the $1,000,000 limit on
> Line 3 (let's assume for this exercise there is no grandfathered
> or home equity debt).
As I have stated elsewhere, Alan's interpretation is more consistent
with the language of the statute, and I was able to find no
regulation to the contrary.
--
Stu
http://downtoearthlawyer.com
Mark Bole
> Alan <sfcn...@yahoo.com> wrote:
>> D. Stussy wrote:
>
>>> WRONG! The amount borrowed remains constant over the life of
>>> the loan. It is NOT adjusted by the amount repaid. The
>>> percentage of allowable interest is computed ONCE and applied
>>> to all years until paid off or refinancing (for more than the
>>> remaining balance) occurs.
>>>
>> I am totally flabbergasted that what is so clear to me is not
>> clear to you. The worksheets in Pub 936 are consistent with the
>> regulations in 1.163. They both clearly state that for any tax
>> year, you enter the average balance of all of your home
>> acquisition debt for that year! That's why Table 1 has you enter
>> the balance on Line 2 and compares it to the $1,000,000 limit on
>> Line 3 (let's assume for this exercise there is no grandfathered
>> or home equity debt).
>
> As I have stated elsewhere, Alan's interpretation is more consistent
> with the language of the statute, and I was able to find no
> regulation to the contrary.
>
Plus, it's what is in the Pub. You can rely on written advice from the
IRS to avoid penalties. It's funny how often people will say the IRS
pubs are not "final authority", but they never come out and say the pubs
are wrong, either.
I have seen tax textbooks that had the same incorrect position as
Utterback and Stussy, so it could be a common mis-conception.
Bill Brown wrote:
> If your only access to tax law is IRS publications then you have too
> little access to be offering tax advice or other tax services, in my
> opinion.
If your access to tax code and regulations is so broad that you can't
always make sense of it, cross-reference it, or be sure you have the
very latest, then you could do much worse than to limit yourself to the
IRS pubs.
-Mark Bole
Stuart A. Bronstein
>> As I have stated elsewhere, Alan's interpretation is more
>> consistent with the language of the statute, and I was able to
>> find no regulation to the contrary.
>
> Plus, it's what is in the Pub. You can rely on written advice
> from the IRS to avoid penalties. It's funny how often people
> will say the IRS pubs are not "final authority", but they never
> come out and say the pubs are wrong, either.
Oh, I have been known to do that. On occasion I might even claim
that a regulation is wrong. But that doesn't happen very often.
> I have seen tax textbooks that had the same incorrect position
> as Utterback and Stussy, so it could be a common mis-conception.
It seems to be a natural mistake. The rule concerning refinancing
does seem to lock in the value, so that future refinancing at a
higher level would not permit increasing the deduction. So
thinking the same kind of rule would apply to initial values over
$1 million is not unreasonable.
But that's not what the statute says. It says that qualified
interest is "any interest" that is paid during the year, but only
limited to interest on a principal amount (for "any period") of $1
million or less. It doesn't say it applies to interest only on the
initial proportion of principal that qualified for the deduction.
--
Stu
http://downtoearthlawyer.com
Seth
Stuart A. Bronstein <spam...@lexregia.com> wrote:
>Oh, I have been known to do that. On occasion I might even claim
>that a regulation is wrong. But that doesn't happen very often.
I've done that too.
The initial definition of "highly paid" (for use with pension plans)
was, IIRC, "paid more than 2/3 of the employees". That was in the
code.
I noted that a doctor's office with two doctors both earning $200,000
per year and 3 other less-paid employees had _no_ highly paid
employees by that definition. The IRS regulations, when published,
did not follow the wording of the law.
Seth
D. Stussy
news:Xns9D2DB9468D1CCs...@130.133.4.11...
> Mark Bole <ma...@pacbell.net> wrote:
> >> As I have stated elsewhere, Alan's interpretation is more
> >> consistent with the language of the statute, and I was able to
> >> find no regulation to the contrary.
> >
> > Plus, it's what is in the Pub. You can rely on written advice
> > from the IRS to avoid penalties. It's funny how often people
> > will say the IRS pubs are not "final authority", but they never
> > come out and say the pubs are wrong, either.
>
> Oh, I have been known to do that. On occasion I might even claim
> that a regulation is wrong. But that doesn't happen very often.
>
> > I have seen tax textbooks that had the same incorrect position
> > as Utterback and Stussy, so it could be a common mis-conception.
>
> It seems to be a natural mistake. The rule concerning refinancing
> does seem to lock in the value, so that future refinancing at a
> higher level would not permit increasing the deduction. So
> thinking the same kind of rule would apply to initial values over
> $1 million is not unreasonable.
>
> But that's not what the statute says. It says that qualified
> interest is "any interest" that is paid during the year, but only
> limited to interest on a principal amount (for "any period") of $1
> million or less. It doesn't say it applies to interest only on the
> initial proportion of principal that qualified for the deduction.
What you're missing is that the principal of the loan is determined ONCE.
Look at the language in the following subsections with regard to
pre-October 13, 1987 debt [Section 163(h)(3)(D)] and it's clear that the
debt is incurred ONCE, on the date the (or each) loan is taken out.
The reason for having a worksheet every year is that there may be new debt
in any year. That does not mean that one must recompute every year. Note
also that the regulations, at TR 1.163-10(e)(4)(iii), address "average
balance" ONLY when the debt is allocable to MORE THAN ONE EXPENDITURE CLASS
and the total debt exceeds the statutory limits for some class. This is
because amounts allocated to personal expenditures, otherwise not
permiited, are deductible as residence interest if secured and not over
limit. TR 1.163-8 includes ordering rules for determining what class of
debt is paid off first.
The worksheet does NOT apply if there's no diversion of principal to a
non-residence-interest-qualified expenditure. If the debt is all
acquisition and/or equity debt (without regard to the respective limits) -
i.e. its proceeds were applied to a single purpose, one cannot use the
worksheet per the TRs.
To continuously recompute each year is not consistent with the statutory
language, except for home-equity lines of credit - TR 1.163-8(d)(3), or TR
1.163-10(e)(2)(i), when (A) debt exceeds FMV (i.e. insolvent asset), or
when (B) debt exceeds basis (e.g. casualty loss adjusted), or a change in
usage (i.e. allocation between Schedule A and Form 8829 for business use of
home, etc.).
TR 1.163-10(f)(2)(iii) also makes it clear, in that the FMV limitation is
[also] computed once - "as of the time the debt is first secured."
This is the way I learnt it when working for the IRS. Nothing in the Chief
Counsel Memo suggests that such was wrong, except for their specific change
in policy of classifying acquisition debt over the limit as home-equity
debt (up to its limit), thus ignoring the parenthetical clause of 26 USC
163(h)(3)(C)(i).
Maria M.
to $1.1M. No so clear on where you all stand as to whether I will be
able to deduct the interest going forward on the full $1.1M or whether
over the years I need to reduce that amount by a portion of my
principal payments (even when my outstanding morgage amount continues
to exceed $1.1M as Mr. Utterback proposed.
Maria
Bill Brown
> So the general concensus seems to be that I CAN deduct interest on up
> to $1.1M. �No so clear on where you all stand as to whether I will be
> able to deduct the interest going forward on the full $1.1M or whether
> over the years I need to reduce that amount by a portion of my
> principal payments (even when my outstanding morgage amount continues
> to exceed $1.1M as Mr. Utterback proposed.
See my post and Mark Bole's follow up dated Feb 25 and Feb 26
respectively. Principal payments apply to the "personal" loan balance
first until that portion is zero.
Stuart A. Bronstein
> "Stuart A. Bronstein" <spam...@lexregia.com> wrote
>>
>> refinancing does seem to lock in the value, so that future
>> refinancing at a higher level would not permit increasing the
>> deduction. So thinking the same kind of rule would apply to
>> initial values over $1 million is not unreasonable.
>>
>> But that's not what the statute says. It says that qualified
>> interest is "any interest" that is paid during the year, but
>> only limited to interest on a principal amount (for "any
>> period") of $1 million or less. It doesn't say it applies to
>> interest only on the initial proportion of principal that
>> qualified for the deduction.
>
> What you're missing is that the principal of the loan is
> determined ONCE. Look at the language in the following
> subsections with regard to pre-October 13, 1987 debt [Section
> 163(h)(3)(D)] and it's clear that the debt is incurred ONCE, on
> the date the (or each) loan is taken out.
�163(h)(3)(B)(2) says,
"The aggregate amount treated as acquisition indebtedness for any
period shall not exceed $1,000,000 ($500,000 in the case of a
married individual filing a separate return)."
Note that it says "for any period shall not exceed $1,000,000."
It doesn't say "on the date of acquisition..."
Likewise the language concerning home equity indebtedness says,
"The aggregate amount treated as home equity indebtedness for any
period shall not exceed $100,000 ($50,000 in the case of a separate
return by a married individual)."
Again, "for any period," not "on the date of acquisition."
�163(h)(3)(D), as you note, deals with debts incurred before
10/13/87. I don't see how that has anything to do with debts
incurred after that. If there were something in that provision
that said that pre-87 loans would NOT be revalued every year if
they were over $1,000,000, that would imply that they otherwise
should be. But there is no such provision.
> To continuously recompute each year is not consistent with the
> statutory language, except for home-equity lines of credit - TR
> 1.163-8(d)(3), or TR 1.163-10(e)(2)(i), when (A) debt exceeds
> FMV (i.e. insolvent asset), or when (B) debt exceeds basis (e.g.
> casualty loss adjusted), or a change in usage (i.e. allocation
> between Schedule A and Form 8829 for business use of home,
> etc.).
1.163-8(d)(3) does not refer at all to home mortgage interest.
Even if it did, it can't supercede the statutory language I noted
above. And 1.163-10(e)(2)(i) doesn't talk at all about the $1
million limitation. How can it make a rule about calculating the
limitation without talking about it at all?
> TR 1.163-10(f)(2)(iii) also makes it clear, in that the FMV
> limitation is [also] computed once - "as of the time the debt is
> first secured."
That regulation also talks about evaluating the price on the date
of acquisition. But it is for a different purpose. As noted
above, the statute (which trumps any regulation) says that the
limitation applies to "any period." To me that means that if, in
any year, the principal amount owed is reduced, it is recalculated
for that "period."
> This is the way I learnt it when working for the IRS.
The IRS often gets things wrong. That's why there is so much
litigation against them, and why the IRS loses its share of those
cases.
--
Stu
http://downtoearthlawyer.com
Stuart A. Bronstein
> So the general concensus seems to be that I CAN deduct interest
> on up to $1.1M.
Right.
> No so clear on where you all stand as to
> whether I will be able to deduct the interest going forward on
> the full $1.1M or whether over the years I need to reduce that
> amount by a portion of my principal payments (even when my
> outstanding morgage amount continues to exceed $1.1M as Mr.
> Utterback proposed.
I think you have misunderstood the debate. The issue isn't whether
you can deduct interest on the full $1.1 million.
The question is, if the total loan is more than that amount, as time
goes on and the principal of the loan goes down to $1.1 million,
whether you can deduct the full amount of interest at that time, or
whether you are limited to the proportion you could take when the
house was first purchased.
--
Stu
http://downtoearthlawyer.com
Gene E. Utterback, EA, RFC, ABA
news:135...@news.IPSWITCH.COM...
>
> In article <hm6uhj$o9k$1...@news.eternal-september.org>, ge...@alliancetax.com
>
> | Say your mortgage was really for $1.3M;
> | You can deduct the interest on $1.1M - this represents 84.615% of your
> total
> | debt.
> | So you can deduct ONLY 84.615% of your mortgage interest.
> |
> | A few years will pass and you'll pay down the mortgage to the point
> where
> | the remaining balance is say $800K (that's all that's left from the
> original
> | $1.3M) you still get to deduct ONLY 84.615% of the interest on this
> loan.
> | Just because the loan balance is NOW below the $1.1M threshold doesn't
> mean
> | you can deduct all of the interest.
>
> larger mortgage to compensate for a temporary cash flow shortage. It
> sounds like you could shoot yourself in the foot doing this. Consider
> an example to see if I am understanding correctly. Ignore the extra $100k
> possibility.
>
> You get a $2M mortgage for a home purchase knowing that soon you will have
> $1M to pay it down. Say you have some bonds coming due or are getting a
> bonus or maybe you are even about to close on the sale of another house
> but
> you can't quite do it in time. A few months later you do indeed get your
> $1M and pay down the $2M mortgage to $1M. Does this mean that for the
> rest
> of the life of the mortgage you are restricted to deducting only 50% of
> the
> mortgage interest?
>
> Dan Lanciani
> ddl@danlan.*com
BANG!
You hit the nail on the head - or shot yourself in the foot if you prefer.
Gene E. Utterback, EA, RFC, ABA
--
Gene E. Utterback, EA, RFC, ABA
news:ae5971c2-142e-4799...@o30g2000yqb.googlegroups.com...
> Of the entire $1,300,000 balance described in the OP, $1,000,000 is
> acquisition indebtedness, $100,000 is equity indebtedness and $200,000
> is personal indebtedness. Principal payments by the debtor first
> reduce the personal indebtedness.
You can trace the debt to see what the money was used for. BUT you do not
get to assign your payments to ONLY the portion of the debt that suits you.
You're reducing the entire debt, not just some portion of it.
> When that reaches zero, equity
> indebtedness is reduced. When the equity indebtedness balance reaches
> zero, payments reduce acquisition indebtedness.
NICE TRY, but no cigar!
Gene E. Utterback, EA, RFC, ABA
--
Gene E. Utterback, EA, RFC, ABA
I posted a while ago about deducting mortgage interest on loans that exceed
$1M. I've read many posts that believe I am incorrect, though I believe
at this time that my position is accurate and correct.
I will admit that it is possible that I'm wrong. I'm a tax specialist, not
an all seeing oracle.
I do have some reference material that I've used as the basis of my
interpretation as well as the result from a recent IRS audit of just such a
mortgage. Unfortunately, it is March 1 and I do NOT have the time at this
time to pull and reread my research - though I do fully intend to do so
after I return from my end of tax season break (probably sometime around
early May).
I have put a note on my office calendar to follow up on this and I promise
to share with the group what I find. If I have to eat crow I will, but
today I think I'm right.
Stuart A. Bronstein
> "Dan Lanciani" <ddl@danlan.*com> wrote
>> You get a $2M mortgage for a home purchase knowing that soon
>> you will have $1M to pay it down. Say you have some bonds
>> coming due or are getting a bonus or maybe you are even about
>> to close on the sale of another house but you can't quite do it
>> in time. A few months later you do indeed get your $1M and pay
>> down the $2M mortgage to $1M. Does this mean that for the rest
>> of the life of the mortgage you are restricted to deducting
>> only 50% of the mortgage interest?
>
> BANG!
>
> You hit the nail on the head - or shot yourself in the foot if
> you prefer.
If that's what the law says. I still haven't seen any authority to
support that position. Again, the statute says the limitation
applies with respect to the amount of the debt with respect to "any
period" rather than the date of acquisition.
--
Stu
http://downtoearthlawyer.com
Alan
> So the general concensus seems to be that I CAN deduct interest on up
> to $1.1M. No so clear on where you all stand as to whether I will be
> able to deduct the interest going forward on the full $1.1M or whether
> over the years I need to reduce that amount by a portion of my
> principal payments (even when my outstanding morgage amount continues
> to exceed $1.1M as Mr. Utterback proposed.
>
> Maria
>
of IRS Pub 936 to compute each year's deductible home mortgage
interest and you will have satisfied the IRS.
Alan
[snip]
the worksheet explicitly states that you are to "Figure the
average balance for the current year of each outstanding home
mortgage." and "Add the average balances together and enter the
total on line 9."
That's the way I have always done it.
D. Stussy
> On Mar 1, 12:06 pm, "Maria M." <rjmali...@aol.com> wrote:
> > So the general concensus seems to be that I CAN deduct interest on up
> > to $1.1M. No so clear on where you all stand as to whether I will be
> > able to deduct the interest going forward on the full $1.1M or whether
> > over the years I need to reduce that amount by a portion of my
> > principal payments (even when my outstanding morgage amount continues
> > to exceed $1.1M as Mr. Utterback proposed.
>
> See my post and Mark Bole's follow up dated Feb 25 and Feb 26
> respectively. Principal payments apply to the "personal" loan balance
> first until that portion is zero.
And some of us disagree. The allocation is based on the class of
expenditure that the loan proceeds were put toward (TR 1.163-8). Such is
determined ONCE - when the loan is taken out and its proceeds disbursed.
Suppose your loan was $1.2M and applied wholly as acquisition debt. This
means that for EVERY year over the life of the loan, there will be a
non-deductible portion ($100k/$1.2M = 8.3333%), and a deductible portion
(91.6667%). This will NOT CHANGE. The worksheet in Pub 936 does NOT
apply, because there was a single class of expenditure - acquisition debt.
D. Stussy
news:Xns9D2E6414FFDF9s...@130.133.4.11...
TR 1.163-8 deals with allocating interest across its different classes:
Business debt, investment debt, and acquisition debt.
> > TR 1.163-10(f)(2)(iii) also makes it clear, in that the FMV
> > limitation is [also] computed once - "as of the time the debt is
> > first secured."
>
> That regulation also talks about evaluating the price on the date
> of acquisition. But it is for a different purpose. As noted
> above, the statute (which trumps any regulation) says that the
> limitation applies to "any period." To me that means that if, in
> any year, the principal amount owed is reduced, it is recalculated
> for that "period."
I won't disagree with a statement that says that the regulations are
outdated and may need revision. However, positions contrary to regulations
not ruled invalid by the courts do require the filing of a Form 8275-R with
the return that has a differing position.
Regardless, it is clear from the regulations that we do have that the
"average balance" issue only comes up if a loan applies to more than one
class of interest by having its proceeds applied to more than one class of
underlying expenditure; e.g. a loan in part acquisition debt and in part
business and/or investment debt. A loan which is wholly "qualified
residence debt" doesn't qualify to use the method, and therefore Pub. 937's
worksheet doesn't apply.
> > This is the way I learnt it when working for the IRS.
>
> The IRS often gets things wrong. That's why there is so much
> litigation against them, and why the IRS loses its share of those
> cases.
There's a statement I can strongly agree with! ;-)
However, even the CCMemo indicated that the IRS has historically WON their
old position when arguing the issue before the Tax Court. Therefore, were
they really "wrong" on the issue?
Alan
inclined to follow the instructions in Pub 936 for computing how
much interest I can deduct. I refer to their instructions on page
10 for using Table 1. Those instructions state that you do not
have to use Table 1 if all your debt is grandfathered or the
total of your balances for the whole year is withing the limits
described earlier. Those limits are the $1M of acquisition debt
and $100K of HE debt. Meet either of those two rules and you can
deduct all interest you paid. Then it says, "Otherwise, you can
use Table 1 to determine your qualified loan limit and deductible
home mortgage interest."
There is nothing in those instructions that says Table 1 is only
to be used by taxpayers who have to compute average balances
because interest is being classified in more than one category.
Average balances have to be computed because you may have three
kinds of debt (grandfathered, acquisition & HE) and/or different
loan balances throughout the year on any one mortgage and/or
multiple mortgages on the same property and/or more than one home.
I have concluded that any taxpayer who has debt that is not
within the prescribed debt limits or is all grandfathered should
use Table 1 to make the calculations.
Seth
Alan <sfcn...@yahoo.com> wrote:
>Amen. Besides.... the instructions for completing Line 9 of the
>the worksheet explicitly states that you are to "Figure the
>average balance for the current year of each outstanding home
>mortgage." and "Add the average balances together and enter the
>total on line 9."
Then the IRS is being more generous than the statute. E.g. January 1,
buy a house with a $1.5 million mortgage. July 1, pay of $1 million.
The average balance is under $1 million (assuming a little
amortization), so all the interest is deductible. The statute would
imply that about 2/3 of the first half-year's interest, and all of the
second half's (about 3/4 of the total interest) is deductible.
Seth
Seth
D. Stussy <rep...@newsgroups.kd6lvw.ampr.org> wrote:
>And some of us disagree. The allocation is based on the class of
>expenditure that the loan proceeds were put toward (TR 1.163-8). Such is
>determined ONCE - when the loan is taken out and its proceeds disbursed.
"Acquisition Debt" is a class of expenditure, and remains the
characterization of the full $1.2M. "Acquisition Debt whose interest
isn't deductible due to the limitation" is not a class of
expenditure. (Even if it were, that class would be paid down first,
and the deductible portion would remain at its full size until the
total debt decreased to under the limitation.)
>Suppose your loan was $1.2M and applied wholly as acquisition debt. This
>means that for EVERY year over the life of the loan, there will be a
>non-deductible portion ($100k/$1.2M = 8.3333%), and a deductible portion
>(91.6667%). This will NOT CHANGE.
Where does even the IRS specifically say that?
If the taxpayer refinances, the deductible portion goes back to the
full limitation. Define "refinances"; it can certainly be done with
the same bank (so no mortgage recording tax is due).
Seth
Seth
Gene E. Utterback, EA, RFC, ABA <ge...@alliancetax.com> wrote:
>"Bill Brown" <bro...@longwood.edu> wrote in message
>news:ae5971c2-142e-4799...@o30g2000yqb.googlegroups.com...
>> Of the entire $1,300,000 balance described in the OP, $1,000,000 is
>> acquisition indebtedness, $100,000 is equity indebtedness and $200,000
>> is personal indebtedness. Principal payments by the debtor first
>> reduce the personal indebtedness.
>
>You can trace the debt to see what the money was used for. BUT you do not
>get to assign your payments to ONLY the portion of the debt that suits you.
>You're reducing the entire debt, not just some portion of it.
The IRS says otherwise. You get to assign the principal payments the
way it says, which go first to personal indebtedness.
Seth
Stuart A. Bronstein
> Regardless, it is clear from the regulations that we do have
> that the "average balance" issue only comes up if a loan applies
> to more than one class of interest by having its proceeds
> applied to more than one class of underlying expenditure; e.g. a
> loan in part acquisition debt and in part business and/or
> investment debt. A loan which is wholly "qualified residence
> debt" doesn't qualify to use the method, and therefore Pub.
> 937's worksheet doesn't apply.
I don't see what that has to do with the issue at hand. The way the
statute is written, the calculation can be done when each payment is
made. No averaging is necessary.
And I still haven't seen any authority that says, for purposes of the
home mortgage deduction when the outstanding loan is more than
$1,000,000, that the determination of how much is deductible is made
only once and is locked in thereafter. They may well make the
calculation once for other purposes, but I don't see how that has
anything to do with this particular question.
--
Stu
http://downtoearthlawyer.com
Stuart A. Bronstein
Alan <sfcn...@yahoo.com> wrote:
> We're probably beating this thing to death. However, I am
> inclined to follow the instructions in Pub 936 for computing how
> much interest I can deduct.
Since I don't do returns I wasn't familiar with Pub 936. I went to
take a look at it on the IRS website. It's pretty clear they have
thought out this problem, and allow usage of the current year's
value to determine the mortgage debt limit for the year. Among
other things it says,
"You have to figure the average balance of each mortgage to
determine your qualified loan limit. You need these amounts to
complete lines 1, 2, and 9 of Table 1. You can use the highest
mortgage balances DURING THE YEAR, but you may benefit most by
using the average balances."
> There is nothing in those instructions that says Table 1 is only
> to be used by taxpayers who have to compute average balances
> because interest is being classified in more than one category.
The heading to Table 1 says, "Worksheet To Figure Your Qualified
Loan Limit and Deductible Home Mortgage Interest For the Current
Year." They said what they meant.
Additionally there is a section specifically dealing with mixed-use
mortgages, meaning loans in more than one category. That section
of the form would not be necessary if the form only dealt with
mixed-use mortgages.
> I have concluded that any taxpayer who has debt that is not
> within the prescribed debt limits or is all grandfathered should
> use Table 1 to make the calculations.
Good conclusion, as far as I'm concerned.
--
Stu
http://downtoearthlawyer.com
Stuart A. Bronstein
> And some of us disagree. The allocation is based on the class
> of expenditure that the loan proceeds were put toward (TR
> 1.163-8). Such is determined ONCE - when the loan is taken out
> and its proceeds disbursed.
You have pointed to no language that says that any one-time
determination is used for this purpose. In fact the statute is to
the contrary.
> Suppose your loan was $1.2M and applied wholly as acquisition
> debt. This means that for EVERY year over the life of the loan,
> there will be a non-deductible portion ($100k/$1.2M = 8.3333%),
> and a deductible portion (91.6667%). This will NOT CHANGE. The
> worksheet in Pub 936 does NOT apply, because there was a single
> class of expenditure - acquisition debt.
Publication 936, by its own terms, applies to loans even when there
is a single class of expenditure. Otherwise it wouldn't speak
separately of mixed-use mortgages, and give additional instructions
for them.
--
Stu
http://downtoearthlawyer.com
Dan Lanciani
In article <hmh0aq$frh$1...@news.eternal-september.org>, ge...@alliancetax.com (Gene E. Utterback, EA, RFC, ABA) writes:
| "Dan Lanciani" <ddl@danlan.*com> wrote in message
| news:135...@news.IPSWITCH.COM...
| > You get a $2M mortgage for a home purchase knowing that soon you will have
| > $1M to pay it down. Say you have some bonds coming due or are getting a
| > bonus or maybe you are even about to close on the sale of another house
| > but
| > you can't quite do it in time. A few months later you do indeed get your
| > $1M and pay down the $2M mortgage to $1M. Does this mean that for the
| > rest
| > of the life of the mortgage you are restricted to deducting only 50% of
| > the
| > mortgage interest?
| >
| > Dan Lanciani
| > ddl@danlan.*com
|
| BANG!
|
| You hit the nail on the head - or shot yourself in the foot if you prefer.
Can you avoid the problem for some of the examples above by, e.g.,
borrowing $1M against the bonds or the previous house? Or would the
fact that the borrowed money was used to purchase the new house somehow
cause it to be lumped in with the new mortgage for purposes of the
interest deductibility calculation?
Dan Lanciani
ddl@danlan.*com
Seth
D. Stussy <rep...@newsgroups.kd6lvw.ampr.org> wrote:
>What you're missing is that the principal of the loan is determined ONCE.
Yet it changes every year.
>Look at the language in the following subsections with regard to
>pre-October 13, 1987 debt [Section 163(h)(3)(D)] and it's clear that the
>debt is incurred ONCE, on the date the (or each) loan is taken out.
That's for the grandfather clause only.
>The reason for having a worksheet every year is that there may be new debt
>in any year. That does not mean that one must recompute every year.
So someone needs to take out a $1 equity loan each year to cause the
recomputation? That seems silly.
Seth
D. Stussy
> "D. Stussy" <spam+ne...@bde-arc.ampr.org> wrote:
> > And some of us disagree. The allocation is based on the class
> > of expenditure that the loan proceeds were put toward (TR
> > 1.163-8). Such is determined ONCE - when the loan is taken out
> > and its proceeds disbursed.
>
> You have pointed to no language that says that any one-time
> determination is used for this purpose. In fact the statute is to
> the contrary.
>
> > Suppose your loan was $1.2M and applied wholly as acquisition
> > debt. This means that for EVERY year over the life of the loan,
> > there will be a non-deductible portion ($100k/$1.2M = 8.3333%),
> > and a deductible portion (91.6667%). This will NOT CHANGE. The
> > worksheet in Pub 936 does NOT apply, because there was a single
> > class of expenditure - acquisition debt.
>
> Publication 936, by its own terms, applies to loans even when there
> is a single class of expenditure. Otherwise it wouldn't speak
> separately of mixed-use mortgages, and give additional instructions
> for them.
The treasury regulation is a citable authority. The publication is not.
The regulation prevails.
D. Stussy
news:hmi46n$afk$1...@news.eternal-september.org...
I am aware that the publication lacks that instruction. However, the TRs
don't. Publications are not authoritative. Treasury Regulations are.
> Average balances have to be computed because you may have three
> kinds of debt (grandfathered, acquisition & HE) and/or different
> loan balances throughout the year on any one mortgage and/or
> multiple mortgages on the same property and/or more than one home.
>
> I have concluded that any taxpayer who has debt that is not
> within the prescribed debt limits or is all grandfathered should
> use Table 1 to make the calculations.
And I conlclude that if you do such when the regulation says you can't, you
need a Form 8275-R attached to that return.
Alan
>> loan balances throughout the year on any one mortgage and/or
>> multiple mortgages on the same property and/or more than one home.
>>
>> I have concluded that any taxpayer who has debt that is not
>> within the prescribed debt limits or is all grandfathered should
>> use Table 1 to make the calculations.
>
> And I conlclude that if you do such when the regulation says you can't, you
> need a Form 8275-R attached to that return.
>
discussing. The only TR that exists was issued in 1987 (T.D.
8168, 52 FR 48410, Dec. 22, 1987) as a Temporary Treasury
Regulation in support of the changes in the Tax Reform Act of
1986. It was OBRA 1987 (PL 100-203, 12/22/87) that changed
Section 163 to include the $1M limitation. The Treasury has never
issued any Regulation relating to the OBRA '87 changes.
Therefore, I rely upon the plain language in IRC Sec.
163(h)(3)(B)(ii).
Stuart A. Bronstein
>> There is nothing in those instructions that says Table 1 is
>> only to be used by taxpayers who have to compute average
>> balances because interest is being classified in more than one
>> category.
>
> I am aware that the publication lacks that instruction.
> However, the TRs don't. Publications are not authoritative.
> Treasury Regulations are.
You have pointed to regulations that do not deal with this particular
issue. If there are regulations that are applicable to the issue,
please point them out.
--
Stu
http://downtoearthlawyer.com
Stuart A. Bronstein
>> And I conlclude that if you do such when the regulation says
>> you can't, you need a Form 8275-R attached to that return.
>>
> There are no Treasury Regulations applicable to what we are
> discussing. The only TR that exists was issued in 1987 (T.D.
> 8168, 52 FR 48410, Dec. 22, 1987) as a Temporary Treasury
> Regulation in support of the changes in the Tax Reform Act of
> 1986. It was OBRA 1987 (PL 100-203, 12/22/87) that changed
> Section 163 to include the $1M limitation. The Treasury has
> never issued any Regulation relating to the OBRA '87 changes.
> Therefore, I rely upon the plain language in IRC Sec.
> 163(h)(3)(B)(ii).
Since the language of 163(h)(3) is plain, it would trump any
regulation to the contrary, even if there were one.
--
Stu
http://downtoearthlawyer.com
Stuart A. Bronstein
>> Publication 936, by its own terms, applies to loans even when
>> there is a single class of expenditure. Otherwise it wouldn't
>> speak separately of mixed-use mortgages, and give additional
>> instructions for them.
>
> The treasury regulation is a citable authority. The publication
> is not. The regulation prevails.
Of course. But you have cited no applicable regulation. You have
referred to regulations that deal with other issues, but not this
one. If there is specific language you think supports you point,
please quote it. Pointing to a single long regulation that is, by
its terms, not applicable to this issue, is not helpful.
--
Stu
http://downtoearthlawyer.com
D. Stussy
What yo say may be valid, as statute changes can invalidate regulations.
However, has that ever been argued in court?
As to the regulations issued being "temporary," they certainly aren't
anymore. "Temporary regulations" issued before the statutuory 3-year rule
in 1989 are in fact permanent and in force; at least Tax Court Judge Laro
thinks so.
D. Stussy
> "D. Stussy" <spam+ne...@bde-arc.ampr.org> wrote:
> >> There is nothing in those instructions that says Table 1 is
> >> only to be used by taxpayers who have to compute average
> >> balances because interest is being classified in more than one
> >> category.
> >
> > I am aware that the publication lacks that instruction.
> > However, the TRs don't. Publications are not authoritative.
> > Treasury Regulations are.
>
> You have pointed to regulations that do not deal with this particular
> issue. If there are regulations that are applicable to the issue,
> please point them out.
The regulations I pointed to do deal with the issue - in that they deal
with the allocation of the debt into its various categories: Business,
investment, qualified residence, or personal (the last class meaning the
interest is not deductible). That still comes first, before one has to
consider any limitation on any class of debt.
What some of you are claiming is that some amounts of interest are
deductible just because there's a residence-secured loan regardless of
where the loan proceeds were spent, and that is wrong.
Stuart A. Bronstein
> "Stuart A. Bronstein" <spam...@lexregia.com> wrote i
>> You have pointed to regulations that do not deal with this
>> particular issue. If there are regulations that are applicable
>> to the issue, please point them out.
>
> The regulations I pointed to do deal with the issue - in that
> they deal with the allocation of the debt into its various
> categories: Business, investment, qualified residence, or
> personal (the last class meaning the interest is not
> deductible). That still comes first, before one has to consider
> any limitation on any class of debt.
But they don't deal with the specific issue: assuming a debt
otherwise qualifies for the mortgage interest deduction, is the
amount of the deduction for loans over $1,000,000 calculated once
or each year? The way the statute is written, the calculation is
done each year. You have pointed to no regulation that even
attempts to contradict that specific issue.
> What some of you are claiming is that some amounts of interest
> are deductible just because there's a residence-secured loan
> regardless of where the loan proceeds were spent, and that is
> wrong.
No, it has nothing to do with that. Again, the issue is, when the
loan otherwise qualifies except for its size, what happens when the
principal balance goes below $1,000,000? The statute seems clear,
and you have shown no authority otherwise on that specific point.
--
Stu
http://downtoearthlawyer.com
Stuart A. Bronstein
>> There are no Treasury Regulations applicable to what we are
>> discussing. The only TR that exists was issued in 1987 (T.D.
>> 8168, 52 FR 48410, Dec. 22, 1987) as a Temporary Treasury
>> Regulation in support of the changes in the Tax Reform Act of
>> 1986. It was OBRA 1987 (PL 100-203, 12/22/87) that changed
>> Section 163 to include the $1M limitation. The Treasury has
>> never issued any Regulation relating to the OBRA '87 changes.
>> Therefore, I rely upon the plain language in IRC Sec.
>> 163(h)(3)(B)(ii).
>
> What yo say may be valid, as statute changes can invalidate
> regulations. However, has that ever been argued in court?
Often, though not with respect to this particular issue, of course.
Based on the way the IRS apparently treats these loans, there seems
to be no controversy that would end up in court.
> As to the regulations issued being "temporary," they certainly
> aren't anymore. "Temporary regulations" issued before the
> statutuory 3-year rule in 1989 are in fact permanent and in
> force; at least Tax Court Judge Laro thinks so.
Temporary regulations are still given deference by the courts -
just not quite as much, since they may not have gone through all
the legal requirements to become actual regulations.
--
Stu
http://downtoearthlawyer.com
Maria M.
wrote:
> "D. Stussy" <spam+newsgro...@bde-arc.ampr.org> wrote:
> > "Alan" <sfcnm-...@yahoo.com> wrote in message
> >> There are no Treasury Regulations applicable to what we are
> >> discussing. The only TR that exists was issued in 1987 (T.D.
> >> 8168, 52 FR 48410, Dec. 22, 1987) as a Temporary Treasury
> >> Regulation in support of the changes in the Tax Reform Act of
> >> 1986. It was OBRA 1987 (PL 100-203, 12/22/87) that changed
> >> Section 163 to include the $1M limitation. The Treasury has
> >> never issued any Regulation relating to the OBRA '87 changes.
> >> Therefore, I rely upon the plain language in IRC Sec.
> >> 163(h)(3)(B)(ii).
>
> > What yo say may be valid, as statute changes can invalidate
> > regulations. However, has that ever been argued in court?
>
> Often, though not with respect to this particular issue, of course. �
> Based on the way the IRS apparently treats these loans, there seems
> to be no controversy that would end up in court.
>
> > As to the regulations issued being "temporary," they certainly
> > aren't anymore. �"Temporary regulations" issued before the
> > statutuory 3-year rule in 1989 are in fact permanent and in
> > force; at least Tax Court Judge Laro thinks so.
>
> Temporary regulations are still given deference by the courts -
> just not quite as much, since they may not have gone through all
> the legal requirements to become actual regulations.
>
> --
> Stuhttp://downtoearthlawyer.com
This is all fascinating! I am accountant (not not a tax accountant)
and can follow a lot of what is being discussed here. It never ceases
to amaze me how complicated our tax law is. At the risk of putting
many of you out of business, I have become and advocate of a flat tax
with no exemptions or deductions!!! I think I'll compute my interest
deduction yearly and if I end up in a lawsuit against the IRS I'll
hire a few of you to help me!
Maria
Stuart A. Bronstein
> This is all fascinating! I am accountant (not not a tax
> accountant) and can follow a lot of what is being discussed
> here. It never ceases to amaze me how complicated our tax law
> is. At the risk of putting many of you out of business, I have
> become and advocate of a flat tax with no exemptions or
> deductions!!! I think I'll compute my interest deduction yearly
> and if I end up in a lawsuit against the IRS I'll hire a few of
> you to help me!
We already have a flat tax of sorts - the AMT.
The real problem is what to do about business taxes. They are a lot
more complicated and leave opportunities for more abuse.
--
Stu
http://downtoearthlawyer.com
Alan
regulations (Proposed, Temporary or Final) on this point.
Therefore, relying upon the the plain language in the IRC section
added by OBRA '87 is all I need to make my decision. An 8275-R is
not required as I am not taking a position contrary to a TR.
Seth
D. Stussy <rep...@newsgroups.kd6lvw.ampr.org> wrote:
>The regulations I pointed to do deal with the issue - in that they deal
>with the allocation of the debt into its various categories: Business,
>investment, qualified residence, or personal (the last class meaning the
>interest is not deductible). That still comes first, before one has to
>consider any limitation on any class of debt.
So, when someone gets a $1.5 million mortgage, what class or classes
is that?
1. It's all qualified residence; in that case, the interest on $1
million is deductible this year, and every year until the balance
falls below $1 million, then the full interest is deductible.
2. $1 million is qualified residence (ignoring the $100,000 for
simplification) and $500,000 is personal. In that case, interest
on the $1 million is deductible. But principal paid is applied
first to the personal debt, so the qualified balance remains $1
million until the debt falls below that.
>What some of you are claiming is that some amounts of interest are
>deductible just because there's a residence-secured loan regardless of
>where the loan proceeds were spent, and that is wrong.
Interest on $100,000 is deductible if it's residence-secured, no
matter where the proceeds were spent. But that isn't the point at
issue; rather, if a $1.5 million purchase-money mortgage is taken out,
interest on $1 million is deductible each year until the balance falls
below $1 million. The law says so, and the IRS says so.
Seth
Seth
D. Stussy <rep...@newsgroups.kd6lvw.ampr.org> wrote:
>The treasury regulation is a citable authority. The publication is not.
>The regulation prevails.
The regulation is a citable authority. But since it isn't on point,
it has no more effect than the 19th Amendment to the Constitution
(which is also citable).
Seth
Mark Bole
> This is all fascinating! I am accountant (not not a tax accountant)
> and can follow a lot of what is being discussed here. It never ceases
> to amaze me how complicated our tax law is. At the risk of putting
> many of you out of business, I have become and advocate of a flat tax
> with no exemptions or deductions!!! I think I'll compute my interest
> deduction yearly and if I end up in a lawsuit against the IRS I'll
> hire a few of you to help me!
I agree. I happen to have grandfathered debt, acquisition debt, and
equity debt. One could argue that monthly loan calculations are
unreasonably burdensome, and go for the yearly approach in an audit
situation.
-Mark Bole
Bill Brown
> Maria M. wrote:
> > This is all fascinating! �I am accountant (not not a tax accountant)
> > and can follow a lot of what is being discussed here. �It never ceases
> > to amaze me how complicated our tax law is. �At the risk of putting
> > many of you out of business, I have become and advocate of a flat tax
> > with no exemptions or deductions!!! �I think I'll compute my interest
> > deduction yearly and if I end up in a lawsuit against the IRS I'll
> > hire a few of you to help me!
>
> I agree. �I happen to have grandfathered debt, acquisition debt, and
> equity debt. � One could argue that monthly loan calculations are
> unreasonably burdensome, and go for the yearly approach in an audit
> situation.
>
Mark and Maria,
No one is making either of you deduct mortgage interest. Simplify your
tax computations by taking the standard deduction and ignoring all the
tax credits. Of course your tax liability will increase but probably
not as much as with a flat tax.