Discussion:Excess mortgage interest scenario
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Discussion Forum Index --> Advanced Tax Questions --> Excess mortgage interest scenario
Discussion Forum Index --> Tax Questions --> Excess mortgage interest scenario
Mdempsey31 (talk|edits) said: | 3 November 2009 |
| I've read Pub 936, all the posts here related to the excess mortgage interest topic, and various other material for this topic. Clarity is illusive. Here is a scenario that I have for comment and interpretation.
MFJ filers. Home A was the primary residence in prior years worth more than $1M, no mortgage. Filer takes $1M home equity line on Home A to buy a lot and build a new primary residence, Home B. Filer also takes a $1.1M construction loan to build the new Home B. Fast forward to 2009. Home B now has a mortgage of $1,070,000 converted from the original construction loan. Home B FMV is considered as $1,250,000. Home A still has a $1M home equity line balance. Home B FMV is considered as $1,150,000. (I know - $2M for a home maybe worth $1.25M now? But that is not my concern at the moment.) Here is a summary to show my interpretation as related to 26 USC 163: Home A - 2nd home 9former primary residence) Qualified Residence: TRUE; Type of loan: Home Equity; Qualified Residence Interest: TRUE; Acquisition indebtedness: TRUE; Home Equity indebtedness: FALSE; Amount of indebtedness: 1,000,000; Amount of interest paid: 30,000 Home B - New Primary residence Qualified Residence: TRUE; Type of loan: Mortgage; Qualified Residence Interest: TRUE; Acquisition indebtedness: TRUE; Home Equity indebtedness: FALSE; Amount of indebtedness: 1,070,000; Amount of interest paid: 70,000 I think Home A debt meets the definition of "acquisition indebtedness" because it was used "in acquiring, constructing, or substanitally improving any qualified residence. At first I thought I could consider only the Home B mortgage of $1,070,00 below the $1.1M limit and take the Sch A deduction of $70K for that debt, not considering Home A debt which exceeds the $1.1M limit. Further consideration led me to conclude that I must use both debts in the calculation of deductible home mortgage interest per Pub 936 Table 1 Worksheet. That result is: $1,100,000 / $2,070,000 = 53.1% x $100,000 total interest = $53,100 deductible home mortgage interest. Obviously much less advantageous to the filers. I then considered: Reg Sec 1.163-10T(o)(5) Election to treat debt as not secured by a qualified residence— [[1]] I thought this election could be used to exclude the Home A debt from consideration as qualified residence interest and therefore allow the deduction for $70k of interest paid on the Home B debt. However, all of Home A debt was used to acquire Home B and not for another purpose either deductible or nondeductible. Tracing the debt leads nowhere else. I reluctantly conclude that substance over form renders the election invalid in this case. Is my reasoning accurate and sound? Am I missing a justification that allows $70k of deductible mortgage interest for Home B debt instead of only $53k for the combined Home A debt and Home B debt? Thank you. | |
Death&Taxes (talk|edits) said: | 3 November 2009 |
| Sec. 163(h)(3)(B)(i)(II) "is secured by such residence." Thus the equity loan on A is not acquisition indebtedness. | |
| 4 November 2009 | |
| Pub 936 page 2 specifically says making the election under 1.163-10T(o)(5) may allow you to deduct more mortgage interest and avoid the limitation calculation. I would use that with caution because if things change for your TP in a future year, they may not change the classification of the interest on that loan without IRS consent. I am of the opinion the election applies to the total of a loan, not just a portion of it. There may be other opinions I'm sure.
It also says you may CHOOSE to treat another residence as a second home. It doesn't say that is MANDATORY. If this is a choice, it seems to me you can deduct the interest on the primary residence that is properly secured by the same residence (and facts determine which home is the primary one) and ignore the existence of additional homes if that benefits you. | |
