At ProVision, we recently announced our new School of Tax Strategy as part of our Wealth Strategy U. Welcome to all those who have signed up for this extraordinary opportunity. Let's kick this off by answering a few of the questions already asked by some of our students.
Q. What happens to mortgage deductions after the 1,000,000 base mortgage and 100,000 HELOC? Does it go to nothing? Is there a way to get a tax benefit for over those amounts?
A. I was speaking at an AZREIA (Arizona Real Estate Investors Association) meeting the other night and was asked this exact same question. Most people know that home mortgage interest is limited to $1,000,000 of acquisition indebtedness and $100,000 second mortgage. But does that mean that interest on amounts in excess of these limits are automatically nondeductible?
The answer is NO. The general rule for interest of any kind is that it's character depends on the use of the loan funds. If the use of the funds are for business, the interest is business. If the use of the funds is real estate investing, the interest is attributed to the real estate investment. The same holds true for excess home mortgage borrowing. If the excess borrowings are used for your personal residence, then the excess interest is nondeductible, personal interest. However, if the excess could be traced to a business or investment use, the interest will be business or investment interest.
Let's take an example. Suppose you have a home that cost $1,000,000. Suppose the home appreciates to $2,000,000. You take out a line of credit of $600,000 on the home and use that in your business. The interest on the line of credit is business interest.
Q. Do you recommend TurboTax or other software for tax prep and planning?
A. I don't. I recommend using your Tax Strategist to prepare your tax returns. The reason is that how you prepare your return can be just as important as the tax planning you do. Why? Simply because there are many options for how to report income and deductions on a tax return. The person/firm who created and helped you implement your tax strategy would be the best person/firm to prepare your tax returns.
Look for more answers to more questions next week.
Warmest regards,
Tom