gnome@oliveb.UUCP (Gary) (09/25/86)
What are the ramifications of "taking money out" when refinancing your house? It looks like a good way to finance major home improvements but I am somewhat leary about the long-term effects. HELP!? Gary (allegra,ihnp4,glacier,hplabs)oliveb!oliven!gnome
ken@nsc.UUCP (Ken Trant) (09/25/86)
In article <8@oliveb.UUCP> gnome@oliveb.UUCP (Gary) writes: >What are the ramifications of "taking money out" when >refinancing your house? >It looks like a good way to finance major home improvements >but I am somewhat leary about the long-term effects. >Gary >(allegra,ihnp4,glacier,hplabs)oliveb!oliven!gnome IRS: Loss of Tax Deductions for refinancing The IRS has thrown a major league curve to the estimated 2 million homeowners who are refinancing this year. The points that lenders charge when you trade in a high-priced mortgage are one of the major costs of refinancing. Each point is 1% of the mortgage amount. The IRS is now telling taxpayers that points may not be deducted in the year they are paid. That position can easily cost you $1000.00 or more in higher taxes if you refinance this year. Until its announcement in May, the IRS had not addressed the points-on-refinancing issue officially. In the absence of any IRS guidance to the contrary most advisers assumed that points for refinancing a principle residence (as opposed to a vacation home or rental property) fell in the deductible category. But now the IRS says that assumption was wrong. The loss to the Treasury last year(also known as tax savings to homeowners) was about $450 million, but demanding that the taxpayers write off refinancing points in a little bit at a time over the years could be a Billion dollar decision for the IRS. That's not only costly for those who refinance this year and in the future but it also raises questions for the 750,000 homeowners who refinanced in 1985. The IRS is quick to point out that points on refinancing are still deductible, just not all at once in the year you pay them. Instead this expense is considered prepaid interest to be written off over the life of the loan. Assume you pay 2.5 points on a $150,000, 30-year mortgage to refinance your home. With each point equaling 1% of the mortgage amount, your out-of-pocket cost comes to $3,750. Someone in the 42% tax bracket who deducted the full amount would save $1,575 in taxes. The IRS says that you deduct points over the life of the loan: one-thirtieth each year, for a paltry 1986 deduction of $125. In the 42% bracket, that saves just $52.50. And you have to prorate it for the year; if you refinance in July, you could deduct just one-half of the first one-Thirtieth of the interest. Home Improvements: That's just the beginning of the complications. If you refinance for more than the balance of your mortgage and use the extra cash for home improvements, you have to split the points for tax purposes. If 15% of the new mortgage goes for improvements, for example, 15% of the points can be deducted in the year of the refinancing, with the other 85% deducted in little chunks over the life of the loan. In the year you pay off the mortgage, either because you sell the house or refinance it again, any part of the points not yet deducted can be written off in a lump sum. Since there is generally a correlation between the interest rate and the number of points charged: lower rates usually mean higher points, and vise versa. The loss of immediate deductibility will require you to take a closer look at the advantage of putting up extra cash in points to capture a lower rate. What Now ???: What do you do now if you deducted all your points for your refinance in 1985?. The advice varies, the IRS would like you to file an amended return and pay the taxes due, But advice to the contrary is comming from several sources. Larry Axelrod, a CPA with the Washington office of Touche Ross, recommends against an amended return. When 1985 returns were filed claiming the deduction, the accountant argues, the taxpayers were filing honestly and reasonably. A CPA with another national accounting firm that had recommended claiming the deduction said he wouldn't advise clients to amend their returns. If you don't amend your return and it is audited, a deduction for points paid for refinancing will be disallowed, according to Ellen Murphy, assistant to the IRS commissioner for public affairs. In that case you'd be assessed the extra tax, plus interest,( the current IRS rate is 9%). Auditing of 1985 returns is one to three years away. Experts say there's almost no chance you'd be hit with a negligence penalty for claiming the deduction on your 1985 return. After all, there was no clear guidance from IRS and prevailing advice was that the write-off was permissible Currently legislation to reverse the IRS position on points has been introduced on Capital hill. Sincerly Ken Trant Real Estate Professionals 415-651-3131
king@kestrel.ARPA (Dick King) (09/25/86)
From: gnome@oliveb.UUCP (Gary) Newsgroups: net.invest,net.taxes Date: 25 Sep 86 00:14:52 GMT Distribution: na What are the ramifications of "taking money out" when refinancing your house? It looks like a good way to finance major home improvements but I am somewhat leary about the long-term effects. Under the new law, only the interest on (the sum of the purchase price of the house and the cost of all improvements) is deductible -- the residue is not. Also, points must be deducted as you pay the mortgage. You could therefore "cash out" if you use the money for improvements, provided your current mortgage doesn't exceed the purchase price. (This can happen if either you have already refinanced and cashed out heavily, or if you have a mortgage with heavy negative amortization.) Quick question for the experts: if your mortgage exceeds the purchase price because of negative amortization, do they really mean to not make the excess interest deductible? Suppose you refinance for more than the purchase price to get "out from under" a mortgage that has given you negative amortization in the past? HELP!? Gary (allegra,ihnp4,glacier,hplabs)oliveb!oliven!gnome -dick
rha@bunker.UUCP (Robert H. Averack) (09/26/86)
In article <8@oliveb.UUCP> gnome@oliveb.UUCP (Gary) writes: >What are the ramifications of "taking money out" when >refinancing your house? > >It looks like a good way to finance major home improvements >but I am somewhat leary about the long-term effects. > >HELP!? > >Gary Well, Gary, taking money out, in essence, is borrowing a sum of money which is more than the outstanding principal+interest on your current mortgage. The difference between the two, minus new closing costs, is your final sum. As far as how much, that is determined by the current market value of your home, as determined by an independent appraiser. The bank will take that value and simply apply an "80-percent loan-to-value" maximum, not to exceed your income's ability to make the new monthly payments. In other words, if your house is now worth $100,000, you can borrow up to $80,000, so long as you can make the monthly payments on that loan. Now for the kicker...be very cautious about the real estate trend in your area, because you are putting yourself in a newly "leveraged" position. If the outlook is for good future appreciation, you're in good shape to borrow the money. However, if your area is experiencing near-zero or negative appreciation (e.g. Texas), beware of putting yourself in too much jeopardy. Final word: the new tax law calls for the elimination of interest deductions for "consumer credit", i.e. credit cards, car loans, etc. However, since this borrowed cash is a mortgage, you can continue to deduct your interest payments. Nice beney, huh? Last, but not least (I know, I said final word above...I guess I'm verbose :-), your discount points on a refinance is NOT fully deductible as interest in the first year, like a new mortgage. You must depreciate it over the life of your loan. I know, LONNNGGGG winded, but you did ask for help! :-) :-) Good Luck! Bob Averack -- ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! (Robert H. Averack @ Bunker Ramo, Trumbull, Ct.) ! ! ! ! ## "...it is better to have loved USENET: bunker!rha ! ! #OO# in lofts than to never have UUCP: bunker!/usr/spool ! ! ###### loved at all!" /uucppublic/averack ! ! ##\/## - Julius "Groucho" Marx OFFLINE: 35 Nutmeg Dr. ! ! ###### ("Monkey Business" - 1930) Trumbull, CT 06611 ! ! L L ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
ark@alice.UucP (Andrew Koenig) (09/26/86)
> What are the ramifications of "taking money out" when > refinancing your house? > > It looks like a good way to finance major home improvements > but I am somewhat leary about the long-term effects. The ramifications are exactly the same as the ramifications of taking out a separate loan at the same interest rate and repayment schedule as your refinancing loan.
geoff@ism780c.UUCP (Geoff Kimbrough) (09/26/86)
Summary: In article <3788@nsc.UUCP> ken@nsc.UUCP (Ken Trant) writes: >In article <8@oliveb.UUCP> gnome@oliveb.UUCP (Gary) writes: >>What are the ramifications of "taking money out" when >>refinancing your house? >>It looks like a good way to finance major home improvements >>but I am somewhat leary about the long-term effects. > > IRS: Loss of Tax Deductions for refinancing > > The points that lenders charge when you trade in a high-priced mortgage >are one of the major costs of refinancing. Each point is 1% of the mortgage >amount. The IRS is now telling taxpayers that points may not be deducted >in the year they are paid. That position can easily cost you $1000.00 or >more in higher taxes if you refinance this year. > [...] > Home Improvements: > That's just the beginning of the complications. If you refinance for >more than the balance of your mortgage and use the extra cash for home >improvements, you have to split the points for tax purposes. If 15% of >the new mortgage goes for improvements, for example, 15% of the points can >be deducted in the year of the refinancing, with the other 85% deducted in >little chunks over the life of the loan. > [...] >Ken Trant >Real Estate Professionals >415-651-3131 Thank you, Ken for this informative article. I have one more question. What can you do with the points paid if you refinance to withdraw funds to settle a divorce? (As in buying your ex's half of the equity?) Is there any difference or advantage to refinancing the whole mortgage vs. taking out a 2nd? (aside from the obvious interest rate difference) What, then, if you sell soon afterwards. These are not theoretical questions, I know someone who needs to know, and soon. I'm not sure what you mean by "trading in a high-priced mortgage", in this case, the old mortgage has a lower interest rate than is available now. Will this make a difference in the points charged? Also (this is why I cross-posted to net.legal) are there tax differences between a straight sell-and-divide-profits and refinance and get a quit-claim? Both parties are in about the same tax bracket, by the way. advTHANKSance Geoffrey Kimbrough -- Director of Dangerous Activities INTERACTIVE Systems Corporation, Santa Monica California ihnp4!ima!geoff || sdcrdcf!ism780c!geoff || ucla-cs!ism780!geoff I think, therefore I... I umm... er... nevermind.
rsb@cuuxb.UUCP (Richard S. Brown) (09/30/86)
Does anyone have ANY information (for this year and beyond) for the following situation: Jack buy a house from Ed for FULL price but they agree that Ed will pay the 3 points that Jack's bank will charge him for the loan. The purpose, of course, is this save Jack some "up front" money. Can Ed write off the points that HE paid Jack's bank as some sort of expense (of selling the house)? When Jack sells, should he pay the points of the person HE sells to? Rich Brown Downers Grove, IL cuuxb!rsb
hurf@batcomputer.UUCP (10/07/86)
In article <840@cuuxb.UUCP> rsb@cuuxb.UUCP (Richard S. Brown) writes: >Does anyone have ANY information (for this year and beyond) for the >following situation: > >Jack buy a house from Ed for FULL price but they agree that Ed will >pay the 3 points that Jack's bank will charge him for the loan. >The purpose, of course, is this save Jack some "up front" money. > >Can Ed write off the points that HE paid Jack's bank as some sort >of expense (of selling the house)? > >When Jack sells, should he pay the points of the person HE sells to? > > Rich Brown > Downers Grove, IL > cuuxb!rsb The cost of sale goes against the 'basis' of your real estate if it is a residential sale. At whatever time Ed sold a house & did not buy another same or more expensive house he would either have to take his one time exclusion or ante up taxes on capital gain. For this reason ALL realestate related papers & receipts should be kept for life. All expenses not deducted (or deductable) on an annual return can be charged against this 'basis' at reckoning time. Commercial & some special situations would allow deductions of all or part over a depreciation schedule or on an annual return. The history of Jacks purchase should have no bearing on a subsequent sale. Hurf Sheldon hurf@ionvax.tn.cornell.edu .
kca@iwsam.UUCP (archie) (10/10/86)
> >Does anyone have ANY information (for this year and beyond) for the > >following situation: > > > >Jack buy a house from Ed for FULL price but they agree that Ed will > >pay the 3 points that Jack's bank will charge him for the loan. > >The purpose, of course, is this save Jack some "up front" money. > > > >Can Ed write off the points that HE paid Jack's bank as some sort > >of expense (of selling the house)? Yes, That's exactly what it is. It is not an interest deduction to Ed, but an expense of the sale that reduced his profit. > > > >When Jack sells, should he pay the points of the person HE sells to? That has nothing to do with the first question. It should be decided based on the facts and circumstances of the second sale. If I were the buyer, I would prefer to see the seller reduce the sale price of the house by an amount equivalent to the cost of the points. If the seller pays the points her/himself, they can be deducted (I assume this is a personal residence) on her/his 1040 in the year they are paid as an interest expense. > > The cost of sale goes against the 'basis' of your real estate > if it is a residential sale. This is true for all property sales, not just residential property. > At whatever time Ed sold a house > & did not buy another same or more expensive house he would > either have to take his one time exclusion or ante up taxes > on capital gain. What is the status of the capital gain on a personal residence in the new tax law? > All expenses not deducted > (or deductable) on an annual return can be charged against > this 'basis' at reckoning time. This is not true in the case of personal use property. For example, one can deduct electricity and heat for a commercial property, but not for one's residence. > Commercial & some special situations would allow deductions of > all or part over a depreciation schedule or on an annual return. This must refer to expenses of purchasing a property, not selling it, because you can only depreciate property while you own it.