Discussion:Does % of mortgage interest expense increase each year as principal is paid down on refinanced loan?

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(The question nee)
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{{ForumReplyPost|UserID=Dennis|Date=31 July 2006|Text=The question needs to be analyzed in terms of original acquisition debt. Is there any case for it remaining constant until the additional debt is paid off, or does it have to be reduced pro rata. With Deaner's formula you hit 100% at OAD plus $100,000. }} {{ForumReplyPost|UserID=Dennis|Date=31 July 2006|Text=The question needs to be analyzed in terms of original acquisition debt. Is there any case for it remaining constant until the additional debt is paid off, or does it have to be reduced pro rata. With Deaner's formula you hit 100% at OAD plus $100,000. }}
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 +{{ForumReplyPost|UserID=MSTguy|Date=31 July 2006|Text=Absent specific guidelines, go for what's best for the client, in my opinion. Within reason, of course.}}

Revision as of 23:14, 31 July 2006

Discussion Forum Index --> Tax Questions --> Does % of mortgage interest expense increase each year as principal is paid down on refinanced loan?

DEANER (talk|edits) said:

31 July 2006
Taxpayer has $250,000 home acquisition debt. He refinances and gets $150,000 extra cash out which (for example's sake) is all used for personal purposes.

So he can now write off 350/400ths of the interest expense on the new loan (250 AQUISITION DEBT + 100 HOME EQUITY DEBT = 350).

My question is, as he reduces the loan with principal payments, does the percentage of interest expense he can write off each year increase?

Let's say by the end of the 2nd year, his outstanding principal on this mortgage has dropped from $400,000 down to $375,000. Can he now write off 350/375ths of the interest expense? (I understand it doesn't work so exactly - I have to take the principal balance at the beginning of the year and the principal balance at the end of the year and divide by two, or something like this.)

But in essence, is this right? As principal decreases, does interest expense that can be written off increase?

Riley2 (talk|edits) said:

31 July 2006
The regulations on this issue were never drafted by the Treasury. However, I don't think you can reduce the denominator of the fraction without also reducing the numerator of the fraction. For example, using your example, if the balance on the loan drops to $175,000, using your formula, the taxpayer would be able to deduct 200% (350/175) of the interest. It would make sense to reduce the numerator by some percentage of the total principal payment.

Dennis (talk|edits) said:

31 July 2006
The question needs to be analyzed in terms of original acquisition debt. Is there any case for it remaining constant until the additional debt is paid off, or does it have to be reduced pro rata. With Deaner's formula you hit 100% at OAD plus $100,000.

MSTguy (talk|edits) said:

31 July 2006
Absent specific guidelines, go for what's best for the client, in my opinion. Within reason, of course.
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