🚀 go-pugleaf

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

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                                                               !
 ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

> 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.

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

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
.