FORM 1098 (Mortgage interest reporting)

It's secured in law if not in fact. So that is a completely reasonable approach, and the one the IRS and the courts are more likely to follow.

Still the code is not clear. If someone were to record a mortgage on one square inch of real property, in favor of a credit card company, deduction for interest payments on your credit card bill would certainly be denied as the security is really phony (and one that the creditor really knows nothing about).

In the case were property values dip below the amount owed on a secured obligation, the way the code is drafted, there really is little to distinguish between that and the phony security.

I agree with the result, but not necessarily the reasoning. While it's an excellent reason, it's not one supported by the code, though I imagine regulations to that effect would be proper.

This statement is incorrect and was discussed a while back in this forum. Qualified mortgage interest is interest paid on a loan that is secured by your home and/or a second home up to certain limits. A secured loan is one that has a signed agreement, typically called a mortgage or deed of trust, that obligates the borrower and allows the lender to take the home if the borrower defaults. Lastly, the law requires that this agreement be recorded based on state or local law. Typically, this means recording the mortgage or deed with the county in which the home is located.

Once you meet the above criteria, the borrower can deduct the interest as long as it is the borrower that makes the interest payments. This continues until either the loan is paid off or canceled or the borrower disposes of his interest in the home and the loan obligation is transferred, paid off or canceled.

The statute doesn't require that the security be _good_, only that it meets the terms defined by the statute.

It is still secured, just not by enough assets. (I've been dealing with corporate bonds like that, where a bond is secured by assets worth less than the face amount of the bond. In bankruptcy, the bondholders get (the value of) the securing assets, and the same recovery for the rest of their claim as similar but unsecured bonds.)

You could lend me $10,000 secured by the book I was just reading (worth maybe $5). That isn't very good security, but it's still security, and if I didn't pay you'd have the right to seize the book.

The law says so. Surely you know better than to expect the tax code to make sense.

It's really bad security.

Yes: I hate the homeowner (because he bullied me in third grade), and will gladly buy the second mortgage for $500 to force him onto the street. Therefore, it has value.

Security doesn't ensure that it will get paid in full. It never did.

Seth

If one were small enough to make a credible claim that the square inch of real property was his primary (or secondary) residence, then the interest would be deductible.

If I take a $800,000 loan on a $500,000 house, the house is still security for the loan. The lender is being foolish, which certainly has happened before.

The code defines a secured mortgage without reference to market value of the mortgaged property.

Seth

No.

(C) Unenforceable security interests Indebtedness shall not fail to be treated as secured by any property solely because, under any applicable State or local homestead or other debtor protection law in effect on August 16, 1986, the security interest is ineffective or the enforceability of the security interest is restricted.

Seth

No, it says the debt must be "secured." How is there any security if it is worthless to the creditor?

If it's secured by a $5 book, but the book already secures a $100 debt, it's completely worthless to me. I certainly wouldn't call that security.

Show me where it says that? All it says is that the debt must be secured by the taxpayer's residence. As far as I'm aware, the code does not define "security."

Actually that supports my position. It only says you can deduct interest from security interests that are unenforceable due to debtor protection laws. This security is worthless due to the house being under water and no other reason.

If Congress had wanted worthless security interests to be considered valid in other situations, they could have said so. Since they didn't, under rules of statutory construction, the presumption is that they intended other worthless security interests not to be considered security under the statute.

Immaterial. The Treasury Regulations define secured debt as I have already presented it in this thread. See § 1.163-10T(o)

See above... it is defined in the Regs.

My door is secured by a piece of string. That holds it closed against the wind. It isn't any good against someone trying to break in.

Worthless security is a form of security.

The IRS thinks so. Publication 936:

Secured Debt

You can deduct your home mortgage interest only if your mortgage is a secured debt. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:

• Makes your ownership in a qualified home security for payment of the debt,

• Provides, in case of default, that your home could satisfy the debt, and

• Is recorded or is otherwise perfected under any state or local law that applies.

In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. In this publication, mortgage will refer to secured debt.

It doesn't say anything about the value of the home exceeding the amount of the debt.

Similarly,

Home equity debt is a mortgage you took out after October 13, 1987, that:

• Does not qualify as home acquisition debt or as grandfathered debt, and

• Is secured by your qualified home.

Again, nothing about value.

Seth

But it's still _enforceable_. It isn't provably worthless until it's enforced.

There's a difference between "unenforceable" and merely "worthless".

If Congress hadn't wanted worthless security interests to provide for tax deductibility for interest, it could have said so. It didn't.

Seth