CMG Home Ownership Accelerator WebEx Training Session

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CMG Home Ownership AcceleratorWebEx Training
Session 5Handling Tax Questions
Kern Lewis CMG Marketing [phone] klewis_at_cmg
mortgage.com V1.0 live7.7.06
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Housekeeping

• If you have questions during the call, e-mail
  them to Janice at
• jabuilta_at_cmgmortgage.com
• We will cover them during the session as time
  allows, and individually if time runs out.
• Please mute your line to minimize ambient noise.
  (Press 6 to mute.)
• Stay on the call through the presentation, even
  if you must step away for a moment.

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Handling Tax Questions

• Step One
• Remind everyone (including yourself)You are not
  a tax advisor!
• Step Two
• Recommend strongly that the client involve a tax
  advisor (usually their accountant) to discuss tax
  implications.

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Meet the Accountant

• Get the tax accountant comfortable with this new
  concept.
• Avoid misunderstandings that could delay a loan
  app.
• Build a bridge to a new referral source.

5
Tax Questions

• Three topics to cover
• How interest is paid and reported.
• Why losing a tax deduction can be a good thing
• How the IRS views the question of interest
  deductibility

6
Interest Payments and Reporting

• A Quick Review
• Interest is calculated daily and charged (billed)
  the next month.
• Interest is paid automatically.
• GMAC is paid on time, automatically, unless the
  client has maxed the credit line.
• GMAC issues a traditional 1098 statement for all
  the interest paid. They report it as mortgage
  interest paid.

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Interest Payments and Reporting

• Interest due on this loan is NOT deferred.
• Deferred interest occurs when you pay less than
  the interest due (Option ARM).
• The lender does not receive the cash for that
  extra interest, and lends you the difference.
• The Accelerator pays GMAC cash for all interest
  due. Nothing is deferred, even though you have
  borrowed the money to pay the interest.

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Losing Tax Deductions

• Clients may worry that they will lose their tax
  deduction.
• A false worry. Losing a mortgage interest tax
  deduction is good news!
• Paying 3 to earn 1 in tax savings is a bad
  deal.
• Eliminating a home loan payment saves you more
  money (3) that it loses you in tax deductions
  (1). A net gain of 2!

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Tax Deductibility and the IRS

• Question
• Is the interest paid on a first-position home
  equity line of credit fully deductible?
• Answer
• It depends on what you do with the cash. (Same as
  with any home loan)

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Tax Deductibility and the IRS

• The IRS allows two forms of home loan debt
• Acquisition debt used to buy or improve a home.
• Equity debt used for other purposes
• Debt consolidation
• Car, travel, tuition or other expense

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Tax Deductibility and the IRS

• Acquisition debt interest is deductible on loan
  amounts up to 1 million.
• Equity debt interest is deductible on loan
  amounts up to 100,000.

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Tax Deductibility and the IRS

• The IRS cares how you use the money.
• The IRS does not care how you finance your
  property.
• Both a first-position HELOC and a 30-year fixed
  rate mortgage can be used to buy a house
  (acquisition debt).

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Equity Debt vs. HELOC

• Equity Debt Money you borrow for expenses that
  are not acquisition debt.
• Home Equity Line of Credit A type of loan that
  is secured against your home.
• Two different things with similar names.

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Tax deductibility gray area

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Tax deductibility the point is.

• RED HERRINGS ABOUND!
• Dont miss the main point.
• You will likely save on interest
• HOA often wins even if deductibility is ignored
• Example
• 30Yr FRM 450,000 interest costs (300,000 after
  tax)
• HOA 250,000 interest costs (before tax)

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The Bottom Line

• Interest payments on a first-position HELOC (like
  the Accelerator) are as deductible as any other
  first-loan interest.
• Dont let the name Home Equity Line confuse the
  issue.
• Keep the focus on how the cash-flow benefits of
  this loan can help the client.

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Thank you!