Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (8) | Ignore Thread Prev Thread | Next Thread
Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121185  
Subject: Home equity loan interest deduction limitations Date: 12/15/1998 11:43 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
We are currently in the process of buiilding a new house. To finance this, we have a construction loan and will be selling our current house. However, we are taking out a home equity line of credit to act as the bridge money in case we don't have our current house sold before I need the money to complete the new house. So I have 2 questions: 1) Can I deduct the mortgage interest for the current house as well as the house under construction, or do I have to choose one or the other to deduct? 2) I believe the interest on the home equity loan will be deductible since it is being used to finance the new home. If I assume that the interest for the new house is deductible, are there any limits on the home equity loan that would affect me? The line of credit is for a $150k which is our equity in our existing home if that makes a difference.
Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7240 of 121185
Subject: Re: Home equity loan interest deduction limitati Date: 12/15/1998 8:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
[[We are currently in the process of buiilding a new house.]]

Congrats!!!!

[[ To finance this, we have a construction
loan and will be selling our current house.]]

Certainly not unusual...

[[ However, we are taking out a home equity line of credit
to act as the bridge money in case we don't have our current house sold before I need the money
to complete the new house.]]

Also not unusual...and makes a lot of sense.

[[ So I have 2 questions: 1) Can I deduct the mortgage interest for the
current house as well as the house under construction, or do I have to choose one or the other to
deduct?]]

If you qualify, you can take both mortgages (assumign that you don't have a "second" home hanging around that you are also taking the home mortgage interest deduction on. If you do, stop reading now, because nothing below will apply to you...since you can't have a deductible mortgage on 3 homes at the same time.

But, assuming that you don't have a "vacation" or "second" home hanging around, and your only issues are your current home and the home under construction, you should have no problems IF you qualify for the interest deduction for the property under construction.

You may not know that the rules are a bit tricky with respect to the mortgage interest deduction for a home that isn't quite a home yet...cause it's still under construction. Let's take a look.

A residence under construction may be treated as a qualified residence for a period of up to 24 months, but only if it becomes a qualified residence (without regard to this "under construction rule") as of the time it is ready for occupancy.

The 24-month period referred to above may commence on or after the date construction is begun.

Example: Jack owns a residential lot. On Apr. 20 of year 1, Jack obtains a mortgage loan secured by the lot and any property to be constructed on the lot. He uses the proceeds of the loan to finance the construction of a home on the lot. Construction commences on Aug. 9 of year 1. The home is ready for occupancy on Nov. 9 of year 3, and qualifies as Jack's residence at that time (without regard to the "under construction" rules).

Under these circumstances, Jack may treat the home as a residence for any 24-month period during which it was under construction. This 24-month period may commence on or after the date construction began (Aug. 9 of year 1). If Jack chooses to begin this 24-month period on Aug. 9 of year 1, the period ends on Aug. 8 of year 3. Whether the home is a qualified residence for the period Aug. 9 -- Nov. 8 of year 3 is determined without regard to the "under construction" rules.

So, in order to make you life easier, simply make sure that you can construct and occupy your new home within 24 monts from the time you first begin paying interest on the lot and/or the construction loan.

[[ 2) I believe the interest on the home equity loan will be deductible since it is being used to
finance the new home.]]

Doesn't matter what it is used for...at least for the interest paid on the first $100,000 in equity that you pulled out. But if your LOC loan is greater than $100k, then you'll have to justify where the money went and how it is being paid. If you ARE over the $100k limitation, let me know and we can talk about that in more detail.

[[ If I assume that the interest for the new house is deductible, are there any
limits on the home equity loan that would affect me?]]

Just the $100k limitation that I've noted above.

[[The line of credit is for a $150k which is our
equity in our existing home if that makes a difference.]]

It makes a BIG difference.

Again, the interest on the first $100k is fully deductible (assuming that you had no prior home equity loans outstanding prior to establishing this one). But the interest on the next $50k could get tricky.

If you can track and prove that you are using those funds for the purchase/construction of the new home (via tracking your checks through your LOC account), then you'll fall under the 24 month interest rules as noted above.

But if you have co-mingled expenses out of your home equity LOC account, you could have some serious problems. For example, if you used some of the LOC funds to go on vacation and/or buy a car, or put any of those funds to personal use, you have some issues to deal with.

You can read more about the mortage interest and line of credit information (and also more about the interest tracing rules) in IRS Publications 535 and 936. I would suggest that you check 'em out.

TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7249 of 121185
Subject: Re: Home equity loan interest deduction limitati Date: 12/16/1998 9:09 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thanks, Roy. Since I will be able to track all the funds as going to the new house and since I did know enough not to co-mingle, it sounds like I'll be able to deduct all the interest. I actually learned the co-mingling lesson with TRA86 by accident since we refinanced our then-current house, which was a 3-family, so that we could buy the house we're now living in. Since I put the money in a separate account earmarked for the new home purchase, I was able to track it and meet the rules for deducting that portion of interest on Schedule A and the rest on Schedule E. It's a lesson that has stuck pretty good, and I tend to keep funds separate.

Your answer was great!

Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7271 of 121185
Subject: Re: Home equity loan interest deduction limitati Date: 12/16/1998 7:29 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
[[Thanks, Roy.]]

You are very welcome, my friend...

[[ Since I will be able to track all the funds as going to the new house and since I did
know enough not to co-mingle, it sounds like I'll be able to deduct all the interest.]]

Sure sounds that way!!! HOW in the WORLD did you know not to co-mingle the funds? Heck, even a lot of tax geeks aren't clear on that issue??

[[ I actually learned
the co-mingling lesson with TRA86 by accident since we refinanced our then-current house, which
was a 3-family, so that we could buy the house we're now living in. Since I put the money in a
separate account earmarked for the new home purchase, I was able to track it and meet the rules
for deducting that portion of interest on Schedule A and the rest on Schedule E. It's a lesson that
has stuck pretty good, and I tend to keep funds separate.]]

Great deal. You didn't even have to get ripped to learn the lesson. I have one client who took matters into his own hands in a similar issue, didn't know about the co-mingle issues, didn't understand the law, and DIDN'T CALL ME BEFORE HE MADE THE MOVE. Man...was he sorry when he called me later. We had a BIG mess on our hands.

But I will say: He may now know the interest tracing rules even better than ME! It is sounds like you may also.

[[ Your answer was great!]]

Your question wasn't bad either. :-)

TMF Taxes
Roy

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7274 of 121185
Subject: Re: Home equity loan interest deduction limitati Date: 12/16/1998 7:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Regarding #7271, JABoa is somewhat proud to say he doesn't put posters on his Favorite Fools list for nothin'.

Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7291 of 121185
Subject: Re: Home equity loan interest deduction limitati Date: 12/16/1998 9:37 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
[[Regarding #7271, JABoa is somewhat proud to say he doesn't put posters on his Favorite Fools
list for nothin'.]]

Sorry, JAB...but I'm not quite followin' your post here.

If it is a GOOD thing, I thank you very, very much.

If it is a BAD thing, take it up with my boss :-)

But regardless of WHAT it is...you just gave the Fool your $.02 for Save our Strength. I see your name around the Fool Folder a lot, so I'm sure that you know what the "Give Us Your Two Cents" program is all about.

But for those of you who may not, click on the Save our Strength logo in the lower left hand of the screen. You'll find out much more about how YOU can give $.02 to charity just by leaving a small post...even just a post to say "Thank You" (or even "nuts to you").

JAB has pulled his weight by placing MANY substantive posts in many of the Fool Folders. And ALL of us Fools appreciate it, JAB.

JAB...all on his own...has helped to feed a hungry child with all of his posts, while at the same time providing valuable information for a number of other Fools...and should be VERY proud about it!!! I know that I'm very proud of JAB and others like him.

Now then...how about you. Give us your $.02. It only takes a second...and may change a person's life.

TMF Taxes
Roy

Print the post Back To Top
Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7296 of 121185
Subject: Re: Home equity loan interest deduction limitati Date: 12/16/1998 10:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Well, thanks TMFTaxes, and good that we are making the Fool contribute some more to the charity. Actually, I was patting myself on the back for having noticed 2gifts through her posts. We met in person a few days ago, and I am still patting myself on the back for having noticed 2gifts through her posts. In person you will find someone who is astute, responsible, caring, loving to her children, (& insert several more complimentary phrases here.) You would know this through the boards as well, and that is why I think the phrase Fool Community is not an exaggeration.

Print the post Back To Top
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7315 of 121185
Subject: Re: Home equity loan interest deduction limitati Date: 12/17/1998 6:58 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
[[Well, thanks TMFTaxes, and good that we are making the Fool contribute some more to the
charity. Actually, I was patting myself on the back for having noticed 2gifts through her posts. ]]

Great, JAB...I figured this was a good thing...I just couldn't quite figure out how. Thanks for the explanation!!!

TMF Taxes
Roy

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (8) | Ignore Thread Prev Thread | Next Thread
Advertisement