Gregory J. Cook, EA, CPA
Accredited Tax Advisor |
Debt Consolidation ...
Things you
should be aware of before you undertake an aggressive program.
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Borrowing Against Your Primary Residence
There are scenarios where the mortgage
interest you pay on your primary residence may not be tax deductible!
Home mortgage interest is deductible if the loan is for acquisition debt
or the refinance of acquisition debt, loan is to make substantial
improvements to the home, or the loan is "home equity" debt.
Home Equity Debt
Home Equity Debt is defined as a mortgage
you took out after October 13, 1987 that; does not qualify as home
acquisition debt or as grandfathered debt (grandfathered debt is a
mortgage that was taken out prior to October 13, 1987) and is secured by
your qualified home.
Example
You bought your home for cash 10 years ago. You did not have a mortgage
on your home until last year, when you took out a $20,000 loan, secured
by your home, to pay for your daughter's college tuition and your
father's medical bills. This loan is home equity debt.
Home equity debt limit. There is a limit on the amount of debt that can
be treated as home equity debt. The total home equity debt on your main
home and second home is limited to the smaller of:
$100,000 ($50,000 if married filing separately), or
The total of each home's fair market value (FMV) reduced (but not below
zero) by the amount of its home acquisition debt and grandfathered debt.
Determine the FMV and the outstanding home acquisition and grandfathered
debt for each home on the date that the last debt was secured by the
home.
Example
You own one home that you bought in 2000. Its FMV (Fair Market Value) now is $110,000, and
the current balance on your original mortgage (home acquisition debt) is
$95,000. Bank M offers you a home mortgage loan of 125% of the FMV of
the home less any outstanding mortgages or other liens. To consolidate
some of your other debts, you take out a $42,500 home mortgage loan
[(125% × $110,000) − $95,000] with Bank M.
Your home equity debt is limited to $15,000. This is the smaller of:
$100,000, the maximum limit, or
$15,000, the amount that the FMV of $110,000 exceeds the amount of home
acquisition debt of $95,000.
Debt higher than limit. Interest on amounts over the home equity debt
limit (such as the interest on $27,500 [$42,500 − $15,000] in the
preceding example) generally is treated as personal interest and is not
deductible. But if the proceeds of the loan were used for investment,
business, or other deductible purposes, the interest may be deductible.
Mortgage Loan Broker - American Pacific Mortgage Corporation is California based mortgage net branching company providing banking services to mortgage brokers and bankers.
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