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Refinancing of Personal Residence Debt - the Limitations

By
Managing Real Estate Broker with Keller Williams Northland

When refinancing the debt for acquisition of a personal residence there are limitations for deductible interest. The refinanced debt that is equal to the principal amount on the original acquisition debt is qualified acquisistion debt, and any amount above that figure is not classified as qualified residence debt. This excess debt interest is generaly not deductible (exception: business debt, investment debt, home improvement).

Why is this information significant? Be prepared for the IRS to begin paying attention to these calculations which have been ignored by many taxpayers. This will be a source for increased revenue for the government, and don't forget if an infraction is discovered they can search backwards.

Comments (4)

Keith Jeppson - Salt Lake City Real Estate
Everest Realty Group - Holladay, UT
Thaks for the reminder David.  I think this is a looming problem for many home owners. 
Dec 28, 2006 03:56 AM
David A. Podgursky PA
THE PODGURSKY GROUP @ Re/Max Direct - Boynton Beach, FL
THE PODGURSKY GROUP - Make the Right Move!

I believe it is a problem but moreso with the state of reverse mortgages... I think that if you are keeping that family home for 30-40yrs then yes, you'll run into issues like this...

but for the majority of the market that is moving every 4-5 yrs, the idea of refinancing and affecting taxes is probably not as big of a problem because right now most markets are just not appreciating enough to matter.

I think the problem occurs when someone who owns their house outright or bought for cash suddenly needs the cash for whatever reason and moves to get it through a mortgage.  There was no acquisition indebtedness tied to the property so there could be some major red flags there.  The thing is that since you cannot finance a retirement, it is becoming more and more of a challenge to keep people from having to go the dangerous route of reverse mortgage because they become too far gone into retirement where they have exhausted their nest eggs and with no income they don't qualify for a conventional program.

More counselling of this nature needs to be offered with financial planners, HR people and the mortgage professionals they associate with. 

Feb 08, 2007 02:14 PM
David Spencer
Keller Williams Northland - Kansas City, MO
Show Me real estate in Kansas City
Reverse mortgages are an issue, but the home owner who does not seek tax advice before cranking money out of his home to payoff accelerating credit card debt is going to have a surprise. This rule also promotes 100% financing which now is very risky.
Feb 09, 2007 08:05 AM
David A. Podgursky PA
THE PODGURSKY GROUP @ Re/Max Direct - Boynton Beach, FL
THE PODGURSKY GROUP - Make the Right Move!

Agreed... but then that brings the CPA into the mix and I believe that CPAs are very poorly educated in Mortgages.  I think they believe they know what is best but more of them should be seeking us out to work with so they can dispense advice with a licensed professional in the mortgage industry backing them as we would if we were advising on tax ramifications.

 

Feb 10, 2007 11:22 AM