Jumbo mortgage tax break?
By Kay Bell • Bankrate.com
Monday, Oct. 19
Here’s an interesting tax juxtaposition.
While inflation has been so low that personal exemptions and standard deduction amounts will be basically unchanged in 2010, the IRS has decided that homeowners with million-dollar mortgages can write off a bit more of their interest.
In an internal legal memo, the IRS has concluded that taxpayers can deduct interest on the first $1.1 million of a home mortgage. That’s $100,000 more than before.
Depending on their tax bracket and mortgage interest rate, affected homeowners could save $3,000 a year or more, tax lawyer Kaye Thomas told Forbes.com.
Even better for such heavily indebted homeowners, Thomas says they can take advantage of the new IRS position and file amended returns to reap the larger interest deduction break.
Diverging from court decisions: The new IRS position differs from two earlier U.S. Tax Court memorandum decisions that followed tax law as we’ve known of for years.
Typically, if you purchase a home with a mortgage of more than $1 million, you could deduct interest on only $1 million. If you took out another loan secured by the home and it met certain requirements, you could deduct up to $100,000 of that loan amount as home equity debt.
All told, the maximum combined limit for interest deduction purposes was $1.1 million.
That dollar cap still applies. But the IRS now says that homeowners who have first mortgages up to $1.1 million don’t have to worry about the differentiation between acquisition and home equity debt. If they take out an enormous loan to buy their mansion, they can deduct interest on $1.1 million of it.
The IRS memo from the Office of Chief Counsel says the change is consistent with how the term “acquisition indebtedness” is used in other tax provisions. “We believe that the position in this memorandum is the better interpretation,” says the agency’s lawyer.
Thomas told Forbes that the IRS has a point. If a taxpayer can deduct interest on an additional $100,000 of home equity debt, on top of a $1 million first mortgage, why shouldn’t the full $1.1 million be allowed for the original purchase?
That certainly sounds reasonable to the 137,670 residence owners who, according to mortgage data firm First American CoreLogic, have mortgage balances of more than $1 million.
But for the rest of us — or me, at least — it doesn’t quite compute.
Now I’m not a lawyer, so I’ll allow that the IRS legal minds probably can parse the tax code a bit more delicately than I can.
And I realize that in today’s go-go America, we’re all for shortcuts and multitasking.
But taxes have always struck me as a more orderly, albeit often incomprehensible, discipline. To my mind, acquisition debt and equity debt are different animals, and are addressed as such in the code, so the tax breaks for each should be separate, too.
Yes, some home equity debt is considered acquisition debt if it meets certain standards. But that’s usually after the house has been acquired. This new IRS decision circumvents the necessity of that next step.
If the IRS wants the mortgage interest limit on acquisition debt to be $1.1 million instead of $1 million, then it should make its case to Capitol Hill and have the lawmakers change the tax code.
The combination via IRS memo of two-for-one tax breaks is a convenient money-saving advantage for buyers of high-dollar residences that strikes me as violating the spirit, if not the letter of the law.
Estate tax article: Last week in my post about the dream of estate tax simplification, I cited an article by David Cay Johnston that was available only to subscribers of Tax Analysts. I got a note from Mr. Johnston that the publication also offers a version available to nonsubscribers. Enjoy!
Reposted by the best Texas Jumbo mortgage lender with the lowest rates
Tags: jumbo loan texas, jumbo mortgage, taxes