ajf@pyuxa.UUCP (A Figura) (10/08/86)
I'm real confused about the impact of the new tax law on home equity loans & second mortgages. In the past, where some people advocated taking as big a mortgage as your cash flow could handle (in general), and when any interest payments were deductible, you knew where you stood with an equity loan; it was basically an extension of your first mort. If your cash flow had improved (and your house had appreciated - thank God I live in a place like NJ, where its appreciated >50% in a year and a half), why not take advantage of the extra equity and get the tax deduction? Now I'm not so sure - will I lose the interest deduction next year if I take out an equity loan now? Does it still make sense to even take one (from either a tax-advantage or inflation-hedging point of view)? I've heard conflicting views on the deductibility of equity loans/second mortgages. Does anyone have any specific details? I've heard that you can deduct combined interest payments up to the original cost of your home. Therefore, if I paid $X for the house and got a first mortgage for $Y, I could deduct any new loan up to $(X-Y). Right? Wrong?? Then I heard you could only deduct second mortgages for big-ticket improvements (like a new deck or added room, for instance). Then I heard, they're not deductible at all. Then I heard, only deductible if you closed before August 86. And you wonder why I'm confused?? Anybody got any enlightenment to offer?
jld@ulysses.UUCP (Jeff David) (10/09/86)
> I've heard conflicting views on the deductibility of equity loans/second > mortgages. Does anyone have any specific details? I've heard that you > can deduct combined interest payments up to the original cost of your home. > Therefore, if I paid $X for the house and got a first mortgage for $Y, > I could deduct any new loan up to $(X-Y). Right? Wrong?? > ... > > Anybody got any enlightenment to offer? Here is the story as of now on Home Equity Loans. If you closed on the loan before August 16, 1986, there are no restrictions on how much you can borrow against your home. You can borrow for ANY purpose and still deduct the interest. If you closed on the loan on or after August 16, 1986, you can only deduct the interest on the portion of the loan up to the basis of the house - i.e. the original purchase price + improvements. Interest on loan amounts in excess of the basis will be deductible only if incurred for educational or medical expenses. Example: You paid $100000 and took out an $80000 first mortgage on your house. Lets say you put $10000 of improvements into the house, have paid off $5000 of principal on the loan, and your house is now worth $150000. Many banks will lend you 80% of the value less your first mortgage. In this case let's assume you can borrow ($150000 * .8) - ($80000 - $5000) = $45000. The basis of your house is $100000 (what you paid) + $10000 (improvements) = $110000. Since your first mortgage has $75000 remaining, $110000 - $75000 = $35000 of the $45000 you borrowed could be used for any purpose whatsoever and still have the interest be deductible. The interest on the remaining $10000 could be deducted only if you used the money for educational or medical expenses. If you were astute enough to borrow the money before August 16, 1986, there would be no restriction on the other $10000 either. Jeff David NOTE: THE ABOVE INFORMATION IS FROM SOURCES THAT I CONSIDER TO BE RELIABLE. I HAVE TALKED TO BOTH A FINANCIAL PLANNER AND AN ACCOUNTANT KNOWLEDGABLE IN THE NEW TAX LAW, PLUS I HAVE CULLED INFORMATION FROM THE WALL STREET JOURNAL AND CHANGING TIMES MAGAZINE. THE SENARIO ABOVE HAS BEEN MANUFACTURED BY MYSELF AND IS BASED ON INFORMATION AND EXAMPLES OBTAINED FROM THOSE SOURCES.
nxs@cuuxb.UUCP (Big Guy) (10/09/86)
If you pay $X for a house and get a mortgage($Y), you can deduct the interest under the new tax structure if the cost is less than or equal to the entire price you paid for the house as you stated. So yes, ( $X - $Y ) would be a valid amount. In addition, any major improvements made to the house since the purchase can be financed and deducted, or can accumulate and be used as an addition to $X( original price ).