REFINANCED MORTGAGE INTEREST MAY NOT ALL BE DEDUCTIBLE

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REFINANCED MORTGAGE INTEREST MAY NOT ALL BE
DEDUCTIBLE
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• Over the past few years, mortgage interest rates
  have dropped significantly and homeowners in
  increasing numbers have refinanced their home
  mortgages and in the process, have extended the
  term of the loan and are frequently taking
  additional cash out to pay down other debts,
  finance education, buy a car, etc. In doing so,
  homeowners may be unwittingly creating a
  situation where part of their home mortgage
  interest may no longer be deductible. Generally,
  the mortgage interest that you may deduct on your
  home includes the acquisition debt and 100,000
  equity debt, provided the combined debt does not
  exceed the value of the home or 1,100,000.

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• The root of the problem is that acquisition debt
  is not a fixed amount, and it steadily declines
  to zero over the term of the original purchase
  mortgage. If that mortgage is refinanced and the
  new term extends past the term of the original
  mortgage or the amount of the mortgage is
  increased, then the amount of the replacement
  debt that exceeds the original acquisition debt
  will no longer qualify as acquisition debt. This
  still may not present a problem so long as the
  replacement debt never exceeds the original
  acquisition debt plus the allowable 100,000 of
  equity debt.
• Example The home was refinanced in the 15th year
  for 300,000. At the time of the refinance, the
  original acquisition debt plus the 100,000
  equity debt totaled 250,000. Therefore, the
  amount of interest from the new 300,000 debt
  will be limited to the interest on 250,000 or
  83.3 of the total mortgage interest (250K/300K).

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• If you have or might refinance, it is imperative
  that you retain a record of the terms of the
  original acquisition debt in case you exceed the
  debt limitation and need to prorate your interest
  deduction.
• When refinancing, you also need to watch out for
  the Alternative Minimum Tax (AMT). The AMT is
  another way of computing tax liability that is
  used, if it is greater than the regular method.
  Congress originally conceived the AMT as a means
  of extracting a minimum tax from high-income
  taxpayers who have significant items of tax
  shelter and/or tax-favored deductions. Since the
  AMT was created, inflation has driven up income
  and deductions so that more individuals are
  becoming subject to the AMT, although Congress
  finally made permanent some of the temporary
  fixes to the AMT, such as inflation-indexing the
  AMT exemptions and tax brackets, which may limit
  the number of taxpayers affected in the future by
  the AMT.

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• When computing the AMT, only the acquisition debt
  interest is allowed as a deduction home equity
  debt interest is not. Neither is the interest on
  debt for unconventional homes such as boats and
  motor homes, even if they are the primary
  residence of the taxpayer.
• Before you refinance a home mortgage, it may be
  appropriate to contact this office to determine
  the tax implication of your planned refinance and
  see if there are any other suitable alternatives.

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Contact Us -

• Address 147-08 235 Street
• Rosedale, NY 11422
• Email info_at_taxreliefrus.com
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