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Mortgage Interest and Tax ConsiderationsDuring the last several years, the federal government has phased out the interest deductions for personal investments, including auto loans and credit card debt. Actually, 1990, represented the last year any consumer interest could be deducted. However, interest on mortgage indebtedness, with certain limitations, is still fully deductible. According to present tax law, the amount of mortgage debt upon which interest can be deducted is calculated according to two parameters: Acquisition Debt and Home Equity Debt. Acquisition Debt is defined as indebtedness which was incurred for the purchase, construction, or substantial improvement of a primary or secondary residence and which is d by the subject property. Full interest deduction is allowed for all acquisition debt as long as the debt does not exceed $1,000,000 and as long as the total debt does not exceed the property's fair market vale. Home Equity Debt refers to debt which is d by a primary or second home which was/is used for any purpose besides the purchase, construction or improvement of the property. There are no limitations as to the use of home equity debt (unless the proceeds are to be used to generate tax-free income.) The proceeds of the loan can be used for any reason including the payoff of personal debt, the purchase of rental properties, automobiles, boats, personal investments or whatever... Complete interest deduction is allowed for home equity debt with a combined total of no more than $100,000. Therefore, the maximum combined loan amount which upon which interest will be fully deductible is $1,100,000. Those individuals who refinanced their properties in previous years have an added bonus. All debt which was d by a qualifying property on or before October 13, 1987 is treated as acquisition debt regardless of the purpose of the loan and irrespective of the original purchase price. Therefore, these individuals can still draw out of their remaining equity an additional $100,000 for virtually any purpose which they desire. In order to tap the equity in a qualifying home, utilization of a second or third mortgage is not the only option. A full refinance of the existing lien(s) with additional cash out is allowed. Of course, the resulting loan will be composed of both acquisition debt, representing the amount of the mortgage(s) paid off, and home equity debt, representing the balance of funds obtained. If a major portion of the funds which are received is for the express purpose of major home improvements, these funds will be allocated to acquisition debt. For tax purposes, the definition of a "home" is not limited to a house or condominium. It may be a mobile home, a cooperative unit, a motor home or even a boat. However, it must supply basic living accommodations, including sleeping space, cooking facilities and a toilet. There are several ways to maximize the tax advantages of borrowed funds. First, when purchasing a residence it is usually best to take out the largest loan possible and decrease the amount of the down payment. Especially for first time buyers, there may be additional cash needs which can be successfully projected over the short term. Moving into a new home usually requires substantial expenses beyond those required for closing the transaction. Furnishings often must be purchased, minor repairs required, pictures and drapes obtained and numerous household items are usually desired. If personal loans are obtained for these items, not only will there be little or no deduction allowed, but the interest rates charged will, unquestionably, be substantially higher than on a mortgage loan. For those who are selling their old residences and moving up, it is most advantageous to first consider paying off all personal debt, including charge cards, automobile loans and other such items and then look at paying down or paying off any loans on bare land or stock margin accounts. As previously stated, these accounts supply no tax advantages and have higher interest costs than mortgage debt. The present tax laws have supplied homeowners with several opportunities, yet there are pitfalls which must be avoided. Overall investment strategies must reflect the new tax structures. This may be the most opportune time to buy or refinance. For additional information, or to discuss specific circumstances, please call. We are pleased to assist you in any way possible. (The foregoing was gathered from sources thought to be reliable and thorough. For major decisions, it is suggested that a competent tax attorney or certified public accountant be consulted.) Written by Rick Keltner - Owner/Broker - Mortgage Resources: 5553 Del Oro Drive, San Jose, CA 95124 (408) 356-1448 |
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