Mortgage Interest Limitation

On 3/1/10 10:50 AM, Stuart A. Bronstein wrote: [snip]

Amen. Besides.... the instructions for completing Line 9 of the the worksheet explicitly states that you are to "Figure the average balance for the current year of each outstanding home mortgage." and "Add the average balances together and enter the total on line 9."

That's the way I have always done it.

As far as I am concerned, just follow the instructions in Table 1 of IRS Pub 936 to compute each year's deductible home mortgage interest and you will have satisfied the IRS.

And some of us disagree. The allocation is based on the class of expenditure that the loan proceeds were put toward (TR 1.163-8). Such is determined ONCE - when the loan is taken out and its proceeds disbursed.

Suppose your loan was $1.2M and applied wholly as acquisition debt. This means that for EVERY year over the life of the loan, there will be a non-deductible portion ($100k/$1.2M = 8.3333%), and a deductible portion (91.6667%). This will NOT CHANGE. The worksheet in Pub 936 does NOT apply, because there was a single class of expenditure - acquisition debt.

TR 1.163-8 deals with allocating interest across its different classes: Business debt, investment debt, and acquisition debt.

I won't disagree with a statement that says that the regulations are outdated and may need revision. However, positions contrary to regulations not ruled invalid by the courts do require the filing of a Form 8275-R with the return that has a differing position.

Regardless, it is clear from the regulations that we do have that the "average balance" issue only comes up if a loan applies to more than one class of interest by having its proceeds applied to more than one class of underlying expenditure; e.g. a loan in part acquisition debt and in part business and/or investment debt. A loan which is wholly "qualified residence debt" doesn't qualify to use the method, and therefore Pub. 937's worksheet doesn't apply.

There's a statement I can strongly agree with! ;-)

However, even the CCMemo indicated that the IRS has historically WON their old position when arguing the issue before the Tax Court. Therefore, were they really "wrong" on the issue?

We're probably beating this thing to death. However, I am inclined to follow the instructions in Pub 936 for computing how much interest I can deduct. I refer to their instructions on page

10 for using Table 1. Those instructions state that you do not have to use Table 1 if all your debt is grandfathered or the total of your balances for the whole year is withing the limits described earlier. Those limits are the $1M of acquisition debt and $100K of HE debt. Meet either of those two rules and you can deduct all interest you paid. Then it says, "Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest."

There is nothing in those instructions that says Table 1 is only to be used by taxpayers who have to compute average balances because interest is being classified in more than one category.

Average balances have to be computed because you may have three kinds of debt (grandfathered, acquisition & HE) and/or different loan balances throughout the year on any one mortgage and/or multiple mortgages on the same property and/or more than one home.

I have concluded that any taxpayer who has debt that is not within the prescribed debt limits or is all grandfathered should use Table 1 to make the calculations.

Then the IRS is being more generous than the statute. E.g. January 1, buy a house with a $1.5 million mortgage. July 1, pay of $1 million. The average balance is under $1 million (assuming a little amortization), so all the interest is deductible. The statute would imply that about 2/3 of the first half-year's interest, and all of the second half's (about 3/4 of the total interest) is deductible.

Seth

"Acquisition Debt" is a class of expenditure, and remains the characterization of the full $1.2M. "Acquisition Debt whose interest isn't deductible due to the limitation" is not a class of expenditure. (Even if it were, that class would be paid down first, and the deductible portion would remain at its full size until the total debt decreased to under the limitation.)

Where does even the IRS specifically say that?

If the taxpayer refinances, the deductible portion goes back to the full limitation. Define "refinances"; it can certainly be done with the same bank (so no mortgage recording tax is due).

Seth

The IRS says otherwise. You get to assign the principal payments the way it says, which go first to personal indebtedness.

Seth

I don't see what that has to do with the issue at hand. The way the statute is written, the calculation can be done when each payment is made. No averaging is necessary.

And I still haven't seen any authority that says, for purposes of the home mortgage deduction when the outstanding loan is more than $1,000,000, that the determination of how much is deductible is made only once and is locked in thereafter. They may well make the calculation once for other purposes, but I don't see how that has anything to do with this particular question.

Since I don't do returns I wasn't familiar with Pub 936. I went to take a look at it on the IRS website. It's pretty clear they have thought out this problem, and allow usage of the current year's value to determine the mortgage debt limit for the year. Among other things it says,

"You have to figure the average balance of each mortgage to determine your qualified loan limit. You need these amounts to complete lines 1, 2, and 9 of Table 1. You can use the highest mortgage balances DURING THE YEAR, but you may benefit most by using the average balances."

The heading to Table 1 says, "Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year." They said what they meant.

Additionally there is a section specifically dealing with mixed-use mortgages, meaning loans in more than one category. That section of the form would not be necessary if the form only dealt with mixed-use mortgages.

Good conclusion, as far as I'm concerned.

You have pointed to no language that says that any one-time determination is used for this purpose. In fact the statute is to the contrary.

Publication 936, by its own terms, applies to loans even when there is a single class of expenditure. Otherwise it wouldn't speak separately of mixed-use mortgages, and give additional instructions for them.

| > You get a $2M mortgage for a home purchase knowing that soon you will have | > $1M to pay it down. Say you have some bonds coming due or are getting a | > bonus or maybe you are even about to close on the sale of another house | > but | > you can't quite do it in time. A few months later you do indeed get your | > $1M and pay down the $2M mortgage to $1M. Does this mean that for the | > rest | > of the life of the mortgage you are restricted to deducting only 50% of | > the | > mortgage interest? | >

| > Dan Lanciani | > ddl@danlan.*com | | BANG! | | You hit the nail on the head - or shot yourself in the foot if you prefer.

Can you avoid the problem for some of the examples above by, e.g., borrowing $1M against the bonds or the previous house? Or would the fact that the borrowed money was used to purchase the new house somehow cause it to be lumped in with the new mortgage for purposes of the interest deductibility calculation?

Dan Lanciani ddl@danlan.*com

Yet it changes every year.

That's for the grandfather clause only.

So someone needs to take out a $1 equity loan each year to cause the recomputation? That seems silly.

Seth

The treasury regulation is a citable authority. The publication is not. The regulation prevails.

I am aware that the publication lacks that instruction. However, the TRs don't. Publications are not authoritative. Treasury Regulations are.

And I conlclude that if you do such when the regulation says you can't, you need a Form 8275-R attached to that return.

There are no Treasury Regulations applicable to what we are discussing. The only TR that exists was issued in 1987 (T.D.

8168, 52 FR 48410, Dec. 22, 1987) as a Temporary Treasury Regulation in support of the changes in the Tax Reform Act of 1986. It was OBRA 1987 (PL 100-203, 12/22/87) that changed Section 163 to include the $1M limitation. The Treasury has never issued any Regulation relating to the OBRA '87 changes. Therefore, I rely upon the plain language in IRC Sec. 163(h)(3)(B)(ii).

You have pointed to regulations that do not deal with this particular issue. If there are regulations that are applicable to the issue, please point them out.

Since the language of 163(h)(3) is plain, it would trump any regulation to the contrary, even if there were one.

Of course. But you have cited no applicable regulation. You have referred to regulations that deal with other issues, but not this one. If there is specific language you think supports you point, please quote it. Pointing to a single long regulation that is, by its terms, not applicable to this issue, is not helpful.