McCord Realty Services

PROBLEM.

I am finding that in increasing number of my clients are buying or refinancing homes on the basis of tax advice from a previous Realtor or Mortgage Broker, rather than the law as defined by the IRS in Pub 936.

They are told that they can claim tax relief on all mortgage interest up to $1,000,000, Even when the loans are on 2 different properties.

WRONG!

There are 3 categories of debt involved here:

1. Home Aquisition Debt. This is defined as “the total amount of all mortgages,  up to a maximum of $1,000,000, used to purchase the property. This can be spread across your main and a 2nd home. The amount will reduced by paying pay off of principal.  Therefore, if you bought a home using a $400,000 mortgage, and have since paid it down to $250,000, your Home Aquisition debt is now $250,000. The interest on this is the amount eligible for a tax deduction. Even if you re-finance for a higher amount only the $250,000 is Home Aquisition Debt.

NOTE: This item is excempted from the Alternative Minimum Tax (A.M.T.). calculation

2. Home Equity Debt. This is a fixed amount of up to $100,000 which can possibly be added to the present Aquisition Debt to increase the amount allowed for tax deduction.

NOTE: This item can be paid down and re-used to the max $100,000 repeatedly. However, it IS included in A.M.T. calculations.

3. Home Improvement Debt. If incurred in order to make improvements in the house, the new debt can effectively increase the present Home Aquisition Debt.

BEWARE. Improvements must either:

Add to the value of the home.

Prolong  the useful lifw of the home,

Adapt the home to new uses.

Ongoing maintenance does not qualify. 

 Any time I have a client who plans to pay cash, or put down a large deposit we have an interesting review of these issues before proceeding. 

I am not formally qualified as a tax advisor or accountant. For advice on this issue and with exceptions to the guidelines please consult a licensed professional.