The IRS is Out to Get You
-- Posted: June 22,2007 | Brian Varvel
Skyrocketing real estate prices and "cash out" refinances have the IRS foaming at the mouth. Mortgage interest deductions are limited to the acquisition indebtedness plus a maximum of $100,000 for home equity indebtedness. For years, homeowners have been able to take advantage of the fact that the IRS has been unable to track the segregation of loan transactions by loan proceeds usage. More than likely this is what led accountants across the country to simply tell their clients "not to worry about it" when they accidentally OVERdeduct mortgage interest on the loans taken against their homes.
Like everything else though, the good times are about to end. The IRS is now requiring lenders to report any cash-out refinance transactions starting for the tax year 2007 on Form 1098. The IRS will then have the means and ability to segregate new loans by proceeds usage thereby affording them a way to pursue unpaid taxes.
Let's look at an example: David and Wendy purchased a home in Katy for $250,000 in 1999. They put down $100,000 as a down payment and financed the remaining $150,000 over 30 years. They set their acquisition indebtedness at $150,000 (value of the loan) but were reducing it as they paid down the loan. In 2005, they refinanced $140,000 into a 15 year note at a lower rate, meanwhile their home's value grew to $340,000. They plan to refinance their home again in 2012 to pay for the kids college education. They understand that they'll need roughly $200,000 to put their kids through college but figure they'll be well under the acquisition indebtedness plus home equity indebtedness limit for tax deductibility of mortgages.
They'll owe about $35,000, borrow $200,000, and be well under that figure right?
WRONG. Acquisition Indebtedness is reduced by an amortizing loan, in their case, it is reduced to about $35,000 (remaining note on the 15 year loan). Add the $100,000 (original down payment) for the equity indebtedness and their limit for the deductibility of interest will be closer to $135,000. The interest on $100,000 of that loan won't be tax deductible, costing them about $2,000 to $4,000 in extra income taxes each year.
And they WILL get caught. The IRS is following the money now. If you've used your home as a virtual ATM and haven't reinvested the proceeds or improved your existing home, you may get stuck owing YEARS of taxes. Pick the right REALTOR, mortgage professional, and CPA when buying a home. If you thought dealing with a professional was expensive, wait until you find out how much dealing with an amateur costs.
Brian Varvel, At Home in Katy
Brian is the owner / operator of the At Home in Katy Team at Keller Williams Realty Katy @ Cinco Ranch. In addition to his real estate career, he is also a regular contributor to multiple websites on real estate and technology. Brian also takes great pride in serving on the Board for Cinco Charities, Inc. a non-profit organization serving the Katy area.
You can contact Brian at:
281.787.0930
brian@athomeinkaty.com
http://www.athomeinkaty.com
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