Banks are concerned about making loans that will be repaid not about making loans that are tax deductible for homeowners. It is good business for the bank but how is the homeowner supposed to know?
Most homeowners and potential homeowners are aware there are tax benefits associated with ownership. For instance, mortgage interest and property taxes have been deductible expenses from federal income tax since it was enacted in 1913.
The current law provides that homeowners can deduct the interest on Acquisition Debt which is the amount of debt incurred to buy, build or improve a first or second home up to $750,000. The amount of acquisition debt decreases as payments are made and it cannot be increased unless the additional funds borrowed are used for capital improvements.
It is not uncommon for a homeowner to refinance their home for any number of reasons. It could be to get a lower interest rate that would lower the payments or remove mortgage insurance. However, when additional funds are borrowed for reasons beyond “buy, build or improve”, the excess is considered personal debt and the interest is not deductible according to IRS.
Maybe this is not important if the owner is taking the standard deduction because it is higher than the total of the property taxes, qualified mortgage interest and charitable deductions made by the taxpayer. Currently, it is estimated that 90% of homeowners are electing to use the increased standard deduction implemented with the 2017 Tax Cuts and Jobs Act.
A confusing issue that occurs at the end of the year is when the lender reports to the borrower the amount of interest that was paid. While that amount is most probably accurate, the bank doesn’t know if it is qualified mortgage interest for the borrower.
It is the responsibility of the taxpayer to keep track of outstanding acquisition debt and whether part of the balance is considered personal debt.
Another area where it could become important is if the property was lost due to foreclosure, deed in lieu of foreclosure or a short sale. The provisions of the Mortgage Forgiveness Act have been extended through 12/31/20 which exempts the forgiven debt from being considered income and therefore taxable. However, it only applies to acquisition debt. Any part of a mortgage refinance that is considered personal debt could be taxable in that situation.
As an example, let’s say that homeowners originally borrowed $300,000 to purchase a home that they owned for 15 years. During that time, the home appreciated significantly, and they refinanced it twice. Once, they made some improvements and took out cash to pay off personal loans and the second time, it was only a cash out.
|Original acquisition debt|
|Remaining acquisition debt including improvements|
|Unpaid balance on current mortgage|
In the example above, the personal debt of $325,000 would be considered income on foreclosure and recognizable as income on that year’s income tax return.
If you have never refinanced your home or have refinanced it but never taken any money out of it except to make capital improvements, your unpaid balance in most likely acquisition debt. However, it you have refinanced your home and pulled money out of it for purposes other than capital improvements, those funds may be considered personal debt.
This article is for information purposes. If you are unclear about the current acquisition debt on your home or need advice for your individual situation, contact your tax professional. Additional information can be found in IRS Publication 936, Home Mortgage Interest Deduction.
If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services. 1008 12th St. SE Salem, OR 97302 503-851-1645
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We are so excited to be coming on to our 10 year anniversary here at Paramount Real Estate Services! We dug through the archives to find this gem back in 2009!
Ray Beaty, Principal Broker
Ray Beaty has 16 years experience as a Real Estate Broker in Salem Oregon. Ray received his Principal Broker’s License in 2006 and continues to challenge himself to bring the highest levels of education for his clients. Ray’s goal is to always “be better than the agent on the other side”. His acute attention to detail and determination to make sure to protect his clients assures that his goals are met.
Ray has a beautiful family with his wife of 31 years, Sherri. They have 4 children that continue to shine as great examples. Daniel serves as the oldest and is married to Mandy. They recently were blessed with their first baby, Hadley Hope. Dallas is their middle son and is married to Jamie. Bryan is the youngest son, and recently married Lindsay. After 3 tough boys, the Beaty’s were finally blessed with a beautiful daughter, Elizabeth. Elizabeth played college softball and is finishing out her degree in Nursing.
Ray serves as Vice Chair on the Board of Education at Chemeketa Community College and is highly involved in this community and his church. Ray values the relationships that he establishes through representation in Real Estate. He treats every client like they are a part of his family, knowing that God has put him in this position to help people. Ray’s clients and customers keep coming back to him because he makes sure to protect their interests with a fiducial responsibility, and gives them an amazing Real Estate experience. If you are looking for an agent to listen to you, protect you, and find a solution to your Real Estate challenges; give Ray a call. Paramount Real Estate Services is so excited to have Ray on board!
Brian White from Paramount Real Estate Services Earns Real Estate, Short Sale Designation to Help Homeowners in Danger of Foreclosure
Salem, Oregon – February 18, 2012 – Brian White of Paramount Real Estate Services in Salem has earned the prestigious Certified Distressed Property Expert® (CDPE) designation, having completed extensive training in foreclosure avoidance, with a particular emphasis on short sales. At a time when millions of homeowners are struggling with the possibility of foreclosure, the skills and education amassed by White will help benefit Salem & Keizer-area residents and communities.
Short sales allow the distressed homeowner to repay the mortgage at the price that the home sells for, even if it is lower than what is owed on the property. With plummeting property values, this can save many people from foreclosure and even bankruptcy. More and more lenders are willing to consider short sales because they are much less costly than foreclosures.
Today, more than 13 percent of homeowners are delinquent on their mortgage or in the foreclosure process. This is occurring across all price ranges, and the fastest-growing category of homes in foreclosure is the luxury home market.
“The CDPE designation has been invaluable as I work with homeowners and lenders on complicated short sales,” said Brian. “It is so rewarding to be able to help families save their homes from foreclosure and help them sell their home on their own terms with dignity.”
Alex Charfen, co-founder and CEO of the Distressed Property Institute in Austin, Texas, said that agents such as Brian White with the CDPE Designation have valuable perspective on the market, and training in short sales that can offer homeowners real alternatives to foreclosure, which can be devastating to credit ratings.
“These experts better understand market conditions than the average agent, and can help sellers through the complications of foreclosure avoidance,” he said.
The Distressed Property Institute provides live and online courses to train real estate professionals how to help homeowners in distress, with a strong focus on handling short sales.
“Our goal is to help as many homeowners as possible, by educating as many real estate professionals as possible,” Charfen said. “Brian White has demonstrated a commitment to struggling homeowners, a commitment that can provide much-needed stabilization to the community.”
Brian says, “in order for our communities, our towns, our states and our country to become healthy and vibrant again; we need to tackle this demanding issue head on. We need to first find successful ways to help homeowners stay in their homes and then clear out the inventory of the homes where homeowners were not successful. This is a critical time for the American people.”
To visit the Distressed Property information page CLICK HERE.
For more information about CDPE Designation, visit www.cdpe.com.
Welcome to Paramount Real Estate Services video introducing Brian & Nina White of Paramount Real Estate in the Mid-Willamette Valley in Oregon. Professional and expert advice is given daily so customers can position themselves correctly in this ever changing and risky market. Paramount Real Estate Services offers valuable information whether you are searching for homes, searching for information as a seller, or would like to keep on top of the Real Estate market.