Calculating The Mortgage Tax Break – Mortgage Interest Deduction Calulation For Itemized Tax Returns, mortgage


Calculating The Mortgage Tax Break

Copyright 2009 by Morris Rosenthal – – contact info

Copyright 2009 by Morris Rosenthal

All Rights Reserved

Mortgage Interest Deduction Calculation For Itemized Tax Returns

The newest tax break is a $8,000 credit for first time home buyers, passed in 2009, to replace the $7,500 credit from 2008. The credit in 2008 was in the form of a no interest loan that was paid back by the taxpayer on their tax filing at $500 a year for the next 15 years. According to what I’ve read in the paper new $8,000 credit (originally a $15,000 tax credit was proposed) is literally a gift, does not have to be paid back, and anybody can get it. The only limitations seem to be that it has to be for your primary residence, and the tax credit may be limited to 10% of the purchase price, so that you can’t buy a $20,000 house in a depressed area and get a $8,000 credit, but it remain fuzzy. I think they have proposed a pahse out with income, started around $80,000, but wasn’t set in stone. Also, starting in 2011, taxpayers who currently pay at the 33% or 35% rate will now have the value of their mortgage deduction capped at 28%, but all of this is pending the passing of the 2009 budget just released by President Obama. See also my new article about determining how much house you can afford.

One of the most abused arguments in discussions over whether to rent or buy a home is the mortgage tax break. Realtors like throwing it out there like an assumed, parents tell their children that it made the country great, but there are a number of catches. As with all tax deductions, as opposed to credits, the “savings” are a percentage of money you are spending. No spending, no savings. In the case of the tax break for home buyers, the deduction amount is equal to the interest you are paying on your mortgage, up to a certain amount. Since most of us don’t have the cash to buy a house outright and will end up with a mortgage, being able to deduct the interest sounds almost like free money. But there are two very big reasons it’s not as simple as it sounds. The first is that you’re forced to itemize rather than taking the standard deduction, and the second is that ultimate savings are dependent on your tax bracket, so if you aren’t earning a lot of money, you can’t save a lot of money. The IRS does allow a special mortgage interest deduction for a home office, and that deduction is worth much more since it comes off your Schedule C gross business income.

The standard deduction in 2007 is $5,350 for single filers, $7,850 for head of household, and $10,700 for married filers. The standard deduction is the “freebie” that all taxpayers can take without itemizing deductions. If you choose to itemize, as you must if you want to get the mortgage interest deduction, you can’t take the standard deduction. Itemized deductions, including mortgage interest, are taken on Schedule A. The total amount of deductions allowed can be limited by your income if you earned more than $150,500, or $75,250 (if married and filing separately). The details are all explained in IRS Publication 936, but the catch is a simple one. If your mortgage interest deduction and all your other Schedule A deductions (primarily state income tax, local taxes, auto excise tax and charity for most filers) is less than your standard deduction, you’d lose money if you itemized. Medical and dental expenses can’t be taken unless they exceed 7.5% of your AGI (Adjusted Gross Income). The mortgage interest and any fees you can deduct (such as closing points) should be sent to you by the lender on a Form 1098 every year.

In most cases, at least during the early years of your mortgage when most of your payment is being applied to the interest, it probably will pay to itemize. But the question we’re trying to determine here is how the mortgage tax break changes your cost of ownership. I went over how to calculate mortgage payments and interest already, so lets pull some arbitrary numbers out of the hat (and make sure you see the lower example for a 4% mortgage). Let’s say you’re in the early years of paying down a $150,000 mortgage, 30 year term, 6.5% interest. The monthly payment is $948.10, so in the first few years of the mortgage, you’re paying about $10,000 a year in interest. Lets also say your property tax is $2,000 a year, you gave $1000 to charity and paid another $2000 in other deductible taxes. How much have you increased your tax deduction by buying a house rather than renting? Well, there’s the $10,000 in interest, plus the $1000 you gave to charity and the $2000 you spent on excise tax, state tax, whatever tax. I’m also giving you credit for the $2,000 you’re paying in property tax, but keep in mind that if you were renting, you wouldn’t be paying property tax. That’s a unique privilege of ownership. So you have $15,000 in Schedule A deductions, versus the $5,350 you could have taken as the standard deduction for a single filer or the $10,7000 if filing as a married couple. In the single case, itemizing and taking the mortgage interest deduction has allowed you to reduce your taxable income by about $10,000, in the married case, you’ve been able to reduce your taxable income by about $5,000. In any case, you need to calculate how much mortgage interest you’re paying each year or create an amortization table.

Now for the bad news. You haven’t saved $5,000 or $10,000, you’ve only reduced your taxable income by that amount. This is where I mentioned you have to be paying a lot of taxes already in order to save a lot of money. It’s the same issue that comes up with buying tax free municipal bonds. If you are earning less than $30,650 as a single filer after deductions or less than $61,300 as a married couple after deductions, the most those deductions are saving you on your taxes is 15%. Our single filer who grosses up to around $40,000 a year and took out a $150,000 mortgage is seeing a tax benefit of about $1,500/year, and our married couple who grosses up to about $70,000/year with the deductions above is saving just $750/year on taxes – 15% of the $5000 of additional deduction. In both cases, the $2000 of property tax more than cancels out the “savings.” All things being equal, it would be cheaper AND more tax efficient to rent the same house for around $1,000 a month.

Note, if the government succeeds in pushing mortgage interest rates down to 4%, that greatly reduces the amount of interest you pay and means the mortgage tax deduction will only come into play for the most expensive houses purchased by high earners. For the $150,000 mortgage example above, if the mortgage rate was 4%, the monthly payment would be $716.12, and the interest portion in the early years would be around $6,000. A married couple would be better off taking the standard deduction unless they could find around another $5,000 in Schedule A deduction, a combination of state and local taxes and charity.For tithers (people paying a 10% tithe to their religious institutions) you might get there, or people in high property tax states like New Hampshire, but I’m guessing the majority of married folks with a mortgage on the median home value in the US will be better off taking the standard deduction. A single person would probably itemize for the first few years of home ownership and save a couple hundred dollars.

So who are the big winners in the mortgage deduction game, other than the realtors who talk buyers off the fence by painting a glowing picture of tax savings? High income individuals who give a lot of money to charity or pay a lot of local taxes are the main beneficiaries, especially if they have large mortgages on expensive properties. There are limits, but in the end, about half of home owning Americans don’t itemize and take the mortgage deduction, either because they are in the later years of their mortgage where the interest portion is much smaller, or because the standard deduction proves to be larger than their itemized deductions. For most of those who do, the “savings” are relatively small. I wouldn’t be a bit surprised if the average savings is less than the average property tax bill, which means no savings at all.

The government is now talking about a new sort of standard deduction for mortgage holders who don’t itemize. The number I saw was $500. Talk about a way to lose a little tax revenue without actually helping anybody, it’s the stupidest idea I’ve heard yet. What the government might do that would be useful and not hurt anybody is change penalty free IRA deduction for first time home buyers from $10,000, where it’s languished forever, to $25,000. But the government isn’t really interested in helping savers.


Under Trump tax plan, would you still deduct mortgage interest, mortgage tax deduction.#Mortgage #tax #deduction


Under Trump tax plan, would you still deduct mortgage interest?

Mortgage tax deduction

The mortgage interest deduction would survive under President Donald Trump’s tax reform plan. But fewer homeowners would use it.

The reason is that the standard deduction would be almost doubled, leaving the mortgage interest deduction only for homeowners who pay the most interest. Those are the people with the biggest home loans.

What you can do

Tax reform will take a long, convoluted path through Congress. Any bill that is signed into law will differ from what was proposed originally. If the expanded standard deduction makes it through, you’ll probably pay less taxes overall, but without using the mortgage interest deduction. Steps to take:

  • If you plan to buy your first home within a few years, consider saving up for a bigger down payment. If you’re not going to deduct your mortgage interest, you will benefit from having a smaller mortgage and thus paying less interest.
  • If you own a home, consider getting a home equity line of credit before tax reform passes. Your home’s value could fall in the future, reducing the equity to borrow from. So you might be able to get a bigger credit line now than you will after tax reform is passed.
  • If you file jointly and deduct more than $24,000 a year, cheer up — you might get to keep deducting mortgage interest, depending on the details of the tax reform that’s eventually passed. Shop for a jumbo mortgage if you’re a big earner.

A simpler tax code?

The fate of the mortgage interest deduction will be debated this spring and summer as Congress and the president wrestle with tax reform.

Treasury Secretary Steve Mnuchin presented the outline — “a broad-brush view,” he said — of a tax plan that would retain the mortgage interest deduction, but decrease the number of homeowners who would take it. Most homeowners would see a reduction in their tax bill, even without deducting mortgage interest, handing them more money to put into savings.

All about the deductions

For middle-class homeowners, the main points of the Trump administration’s proposal are:

  • A reduction in the number of tax brackets, from seven to three.
  • Tax brackets of 10 percent, 25 percent and 35 percent.
  • Elimination of the deduction for state and local income taxes.
  • A big increase in the standard deduction, to $24,000 for joint filers from the current $12,600. Single filers would have a $12,000 standard deduction, up from $6,300.

That last item, the bigger standard deduction, would mean that millions of homeowners would stop using the mortgage interest deduction. In return, they would end up in lower tax brackets, resulting in savings.

Fewer would itemize

Fewer people would use the mortgage interest deduction because of the way itemization works. You file Schedule A when total itemized deductions exceed the standard deduction. For example, if a single taxpayer’s mortgage interest and charitable contributions totaled $10,000 in 2016, he or she itemized — because those costs exceeded the $6,300 standard deduction. Bring on Schedule A!

But if the standard deduction were raised to $12,000 for the same taxpayer, he or she would claim the standard deduction because that’s more than the $10,000 in mortgage interest and charitable contributions.

Trump campaigned on a plan to increase the standard deduction even more — to $30,000 for joint filers and $15,000 for singles. The nonpartisan Urban-Brookings Tax Policy Center estimated that that plan would have reduced itemizers by 60 percent, from 45 million to 18 million. “Even under current law, about three-quarters of tax filers take the standard deduction and would be exempt from a cap on itemized deductions,” writes the center’s Howard Gleckman.

Lower home values

Home values could fall in response to a lessening of the value of the mortgage interest deduction. In a paper published last year, Federal Reserve economist David E. Rappoport calculated that house prices would fall an average of 6.9 percent if the mortgage interest deduction were eliminated.

Rappoport didn’t estimate the effect on home values if the mortgage interest deduction were to remain, but useful to fewer people. He did point out that a drop in house prices would allow first-time homebuyers to pay less for their homes. That could mean more people could afford to buy homes and get mortgages.


Under Trump tax plan, would you still deduct mortgage interest, mortgage tax deduction.#Mortgage #tax #deduction


Under Trump tax plan, would you still deduct mortgage interest?

Mortgage tax deduction

The mortgage interest deduction would survive under President Donald Trump’s tax reform plan. But fewer homeowners would use it.

The reason is that the standard deduction would be almost doubled, leaving the mortgage interest deduction only for homeowners who pay the most interest. Those are the people with the biggest home loans.

What you can do

Tax reform will take a long, convoluted path through Congress. Any bill that is signed into law will differ from what was proposed originally. If the expanded standard deduction makes it through, you’ll probably pay less taxes overall, but without using the mortgage interest deduction. Steps to take:

  • If you plan to buy your first home within a few years, consider saving up for a bigger down payment. If you’re not going to deduct your mortgage interest, you will benefit from having a smaller mortgage and thus paying less interest.
  • If you own a home, consider getting a home equity line of credit before tax reform passes. Your home’s value could fall in the future, reducing the equity to borrow from. So you might be able to get a bigger credit line now than you will after tax reform is passed.
  • If you file jointly and deduct more than $24,000 a year, cheer up — you might get to keep deducting mortgage interest, depending on the details of the tax reform that’s eventually passed. Shop for a jumbo mortgage if you’re a big earner.

A simpler tax code?

The fate of the mortgage interest deduction will be debated this spring and summer as Congress and the president wrestle with tax reform.

Treasury Secretary Steve Mnuchin presented the outline — “a broad-brush view,” he said — of a tax plan that would retain the mortgage interest deduction, but decrease the number of homeowners who would take it. Most homeowners would see a reduction in their tax bill, even without deducting mortgage interest, handing them more money to put into savings.

All about the deductions

For middle-class homeowners, the main points of the Trump administration’s proposal are:

  • A reduction in the number of tax brackets, from seven to three.
  • Tax brackets of 10 percent, 25 percent and 35 percent.
  • Elimination of the deduction for state and local income taxes.
  • A big increase in the standard deduction, to $24,000 for joint filers from the current $12,600. Single filers would have a $12,000 standard deduction, up from $6,300.

That last item, the bigger standard deduction, would mean that millions of homeowners would stop using the mortgage interest deduction. In return, they would end up in lower tax brackets, resulting in savings.

Fewer would itemize

Fewer people would use the mortgage interest deduction because of the way itemization works. You file Schedule A when total itemized deductions exceed the standard deduction. For example, if a single taxpayer’s mortgage interest and charitable contributions totaled $10,000 in 2016, he or she itemized — because those costs exceeded the $6,300 standard deduction. Bring on Schedule A!

But if the standard deduction were raised to $12,000 for the same taxpayer, he or she would claim the standard deduction because that’s more than the $10,000 in mortgage interest and charitable contributions.

Trump campaigned on a plan to increase the standard deduction even more — to $30,000 for joint filers and $15,000 for singles. The nonpartisan Urban-Brookings Tax Policy Center estimated that that plan would have reduced itemizers by 60 percent, from 45 million to 18 million. “Even under current law, about three-quarters of tax filers take the standard deduction and would be exempt from a cap on itemized deductions,” writes the center’s Howard Gleckman.

Lower home values

Home values could fall in response to a lessening of the value of the mortgage interest deduction. In a paper published last year, Federal Reserve economist David E. Rappoport calculated that house prices would fall an average of 6.9 percent if the mortgage interest deduction were eliminated.

Rappoport didn’t estimate the effect on home values if the mortgage interest deduction were to remain, but useful to fewer people. He did point out that a drop in house prices would allow first-time homebuyers to pay less for their homes. That could mean more people could afford to buy homes and get mortgages.


Tax Deductiable Home Expenses, Mortgage Interest, Insurance #mortgage #estimator


#mortgage tax deduction

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How to Claim, Report Tax Deductible Home Expenses

What Are Home Tax Expenses or Home Ownership Tax Deductions?

There are many different home-related expenses which you can deduct on your tax return to reduce your taxable income. During your online tax preparation on efile.com. you will be prompted to enter the information necessary to claim these home tax deductions.

If you need more information on deducting home expenses, read on or see IRS Publication 530-Tax Information for Homeowners .

What Tax Deductions Can I Claim Related to the Common Costs of Purchasing a Home?

You may claim the following expenses on your tax return if you itemize:

  • Home Mortgage Interest payments
  • Real estate taxes
  • Mortgage points (each point is equal to one percentage of the loan amount)
  • Mortgage Insurance Premium payments

What Are Home-Related Expenses That Cannot Be Deducted?

The following expenses cannot be claimed as tax deductions:

  • Fire, flood, or homeowner insurance payments
  • Amounts paid to reduce your mortgage principal
  • General home improvement and maintenance expenses

What Types of Home Improvements Can Be Claimed as Tax Deductions?

Some types of home improvements can potentially lower your tax obligation when you sell your home. Such expenses may include replacing a roof or adding an extension, which increases the usefulness and value of your home. These types of expenses/deductions cannot be used until you sell your home. However, all records should be kept for future use, since any home improvement costs can add up over the years. Be mindful that any normal repair or maintenance on your home is not tax deductible.

What Are Additional Deductible Home Expenses and House Tax Deductions?

You may also claim tax deductions for the following expenses:

  • Refinancing a House. Numerous homeowners build substantial equity from their home and use it to take out home equity loans. This is also called a second mortgage because the loan sits right behind the first mortgage (original mortgage for your home). Homeowners can either take the cash in a lump sum or get a home equity line of credit, which is similar to having a low-rate credit card with the added benefit of being tax-deductible. Of particular interest, if all or some of the new home equity loan is used for home improvements, then all or some portion of the points can be deducted in the current tax year.
  • Accidental Loss. Uninsured losses from fires, floods, earthquakes, storm damage, and theft are current expense deductions. Any accidental, or casualty, losses must be sudden, unexpected and unusual . Losses not considered accidental include losses as a result of termite damage and pipe corrosion. Any accidental losses must exceed 10% of your adjusted gross income to be considered a tax deductible expense.
  • Home Offices : Homeowners can deduct a portion of their utilities, home insurance, property taxes, mortgage interest, and home repairs as business expenses. Homeowners who work at home can even claim a tax break for depreciation on the business portion of their home. The business portion of the home must be used regularly and exclusively for business, and must be either a principal place of business; a place where the homeowner meets patients, clients or customers; or a separate unattached structure. The homeowner can even be an employee and qualify for the tax breaks.
  • Ongoing Tax Breaks: The annual mortgage interest you pay on your home mortgage loan is the most significant deduction available for homeowners and saves homeowners tens of billions of dollars every year. Homeowners can also deduct their annual property taxes expense and some types of annual assessments levied by local districts.
  • Second Home/Vacation Home: Homeowners can deduct mortgage interest and property taxes from second homes and vacation homes as long as the properties are rented for 14 days or less per year. If any rental exceeds the 14-day limit per year, the IRS considers this as an income property. When such income property is sold, the seller will either have to pay the capital gains tax or conduct a tax-deferred exchange for other income-producing real estate of equal or greater value. For income property, mortgage interest, property taxes, and other expenses must be deducted against any income produced by the property. Vacation and second homes include condominiums, houses, apartments, mobile homes, boats, and similar property.
  • Moving Costs : Homeowners who move to a new job location that is 50 miles or more from their previous living situation, may qualify for a residential moving cost deduction. This rule applies to the self-employed as well as to regular company employees. It also applies to those employees who work from home at least 75 percent (39 weeks) of the next year at or near the new job site. A self-employed worker must work at least 75 percent (78 weeks) of the next two years at or near the new job site.
  • Home Energy Savings : If you spend money to make energy efficient improvements to your home, or to install renewable energy sources, you may be able to deduct a portion of your expenses.

Where Can I Find More Information on Tax Deductible Home Expenses?

Additional information about home related tax deductions may be found in IRS Publication 530-Tax Information for Homeowners .

What Other Tax Breaks Can I Claim on My Tax Return?

See what other tax deductions and tax credits you may qualify to claim on your tax return.


How to Avoid Taxes on Canceled Mortgage Debt – TurboTax Tax Tips & Videos #liberty


#mortgage relief act

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How to Avoid Taxes on Canceled Mortgage Debt

The Internal Revenue Service considers most cancelled debts as income for the recipient. The amount of a loan or mortgage forgiven by a lender is taxed as though the borrower earned that amount as income, says Cappy Pearson, tax preparation specialist. However, the Mortgage Debt Relief Act does allow an exemption for certain mortgage or foreclosure situations.

Adding forgiven debts to income

If your forgiven debt is subject to taxation, you will usually receive a form 1099-C, Cancellation of Debt, from the lender, showing the amount of canceled debt. You ll file the 1099-C with your federal tax return, and the amount of canceled debt is added to your gross income.

There are, however, exceptions and exclusions that may save you from the requirement to report canceled debt as part of your income.

Exceptions and exclusions

Not all canceled debt is subject to income tax. The IRS recognizes both exceptions to canceled debt rules as well as amounts that are excluded from gross income due to their origin.
Exceptions include:

  • Gifts, bequests or inheritances
  • Some qualified student loans
  • Any debt that, had it been paid, would have been a deductible item for the borrower
  • A qualified reduction in price offered by a seller
  • Certain payments on the balance of a mortgage under the Home Affordable Modification Program

When a loan is secured by property, such as a mortgage where the home and land stand as collateral, and the lender takes the property as full or partial settlement of the debt, it is considered a sale for tax purposes, not a forgiven debt. In that case, you may need to report capital gains or losses on the sale of the property, but you will not need to add forgiven debt to your income.
Exclusions include:

  • Debt canceled in a Title 11 bankruptcy or during insolvency
  • Canceled qualified farm debt
  • Canceled qualified real property business debt
  • Principal residence indebtedness under terms of the Mortgage Debt Relief Act (2007 through 2016). This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.

If you claim an exclusion, you can t claim tax credits or capital losses or otherwise improve your tax situation using the excluded property.

The Mortgage Debt Relief Act of 2007

Applying only to your principal residence, the Mortgage Debt Relief Act excluded as income any debt discharge up to $2 million. Provisions of the Act applied to most homeowners, and it included partial debt relief gained through mortgage restructuring as well as full foreclosure. Refinancing was also allowed, but only up to the amount of principal balance of the original mortgage.

The Act also covered loans and subsequent debt forgiveness for amounts borrowed to substantially improve a principal residence. You cannot use provisions of the Act for other canceled debts, and the relieved debt must be secured by the principal residence property. The Act covered debt forgiven within the calendar years of 2007 to 2016. This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.

Extension of the Mortgage Debt Relief Act

The Act initially covered a three-year period between 2007 and 2010, but was extended four times, to 2012, 2013, 2014 and then to 2016. This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.

Another way around the tax bite

If you re not covered by the special tax break for principal residences described above, there are two very important exceptions to the cancelled debt = taxable income rule.

The cancelled debt is not income, even if you receive a Form 1099-C, if

  1. You received the cancelled debt due to bankruptcy filing, or
  2. To the extent you are insolvent immediately before the cancellation of the debt.

Insolvency means your debts exceed the value of all your assets. You can exclude cancelled debt from income up to the amount that you are insolvent. For example, if you had assets of $80,000 and debt of $100,000, you are considered to insolvent by $20,000. If you had $30,000 in debt cancelled at this time of insolvency, you would have to include only $10,000 ($30,000 minus $20,000) in your income.

Cancelled debt can be a challenging tax situation especially during hard financial times. TurboTax will guide you through the cancelled debt maze, including the new legislation, and help minimize the pain from in these tough situations.

Get every deduction
you deserve

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Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much – The Motley Fool


#mortgage tax deduction

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Why Your Mortgage Interest Tax Deduction Doesn t Really Help Much

Jan 11, 2015 at 9:33AM

No tax deduction is more misunderstood than the mortgage interest tax deduction. By law, taxpayers can deduct interest paid on their mortgage, but most middle-class taxpayers save little or nothing at all from the mortgage interest tax deduction.

In fact, the mortgage interest tax deduction is more for the benefit of millionaires than it is the average American.

How the mortgage interest deduction works
You can deduct all of your mortgage interest on up to $1 million in principal on the home in which you live. Thus, if you pay interest on a $100,000 mortgage, all of it is deductible. If you pay interest on a $1.5 million mortgage, only the interest on the first $1 million of principal is tax deductible.

But there are limitations. To qualify for the mortgage interest tax deduction, you have to itemize when you file your taxes. By itemizing, you forgo the standard deduction, which starts at $6,200 for singles and $12,400 for couples.

The standard deduction is a baseline. You can opt for the standard deduction, and not itemize, at your discretion. Thus, whether or not the mortgage interest deduction helps your financial being rests on whether or not it pushes you over the standard deduction.

Consider this scenario
You and your spouse paid $10,000 of mortgage interest on your $200,000 home this year. You also had $3,000 in other tax deductions.

When you itemize, you’ll be able to claim $13,000 in tax deductions. If instead you choose not to itemize, you’ll get $12,400 just by virtue of being a married taxpayer.

Thus, the net effect is that only $600 of your mortgage interest is tax deductible, because your deductions exceed the standard deduction for your situation by only $600. If you end up in a marginal tax bracket of 25%, you’ll save about $150 in taxes for paying $10,000 in mortgage interest — not much more than a rounding error.

Tax savings for high earners
All in all, the mortgage tax deduction is a (small-f) fool’s game for middle-class earners in low-cost areas, and a boon for high-income earners in high-cost areas.

Someone who owns a million-dollar home and who pays interest on a $1 million mortgage will inevitably be able to deduct more of their mortgage interest than someone who pays interest on a $100,000 mortgage.

So, while the mortgage interest tax deduction is touted as one of the best reasons to buy a home, it often provides little help to people who don’t live in a modern day McMansion. Buyer beware.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .


How to Avoid Taxes on Canceled Mortgage Debt – TurboTax Tax Tips & Videos #arm


#mortgage relief act

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How to Avoid Taxes on Canceled Mortgage Debt

The Internal Revenue Service considers most cancelled debts as income for the recipient. The amount of a loan or mortgage forgiven by a lender is taxed as though the borrower earned that amount as income, says Cappy Pearson, tax preparation specialist. However, the Mortgage Debt Relief Act does allow an exemption for certain mortgage or foreclosure situations.

Adding forgiven debts to income

If your forgiven debt is subject to taxation, you will usually receive a form 1099-C, Cancellation of Debt, from the lender, showing the amount of canceled debt. You ll file the 1099-C with your federal tax return, and the amount of canceled debt is added to your gross income.

There are, however, exceptions and exclusions that may save you from the requirement to report canceled debt as part of your income.

Exceptions and exclusions

Not all canceled debt is subject to income tax. The IRS recognizes both exceptions to canceled debt rules as well as amounts that are excluded from gross income due to their origin.
Exceptions include:

  • Gifts, bequests or inheritances
  • Some qualified student loans
  • Any debt that, had it been paid, would have been a deductible item for the borrower
  • A qualified reduction in price offered by a seller
  • Certain payments on the balance of a mortgage under the Home Affordable Modification Program

When a loan is secured by property, such as a mortgage where the home and land stand as collateral, and the lender takes the property as full or partial settlement of the debt, it is considered a sale for tax purposes, not a forgiven debt. In that case, you may need to report capital gains or losses on the sale of the property, but you will not need to add forgiven debt to your income.
Exclusions include:

  • Debt canceled in a Title 11 bankruptcy or during insolvency
  • Canceled qualified farm debt
  • Canceled qualified real property business debt
  • Principal residence indebtedness under terms of the Mortgage Debt Relief Act (2007 through 2016). This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.

If you claim an exclusion, you can t claim tax credits or capital losses or otherwise improve your tax situation using the excluded property.

The Mortgage Debt Relief Act of 2007

Applying only to your principal residence, the Mortgage Debt Relief Act excluded as income any debt discharge up to $2 million. Provisions of the Act applied to most homeowners, and it included partial debt relief gained through mortgage restructuring as well as full foreclosure. Refinancing was also allowed, but only up to the amount of principal balance of the original mortgage.

The Act also covered loans and subsequent debt forgiveness for amounts borrowed to substantially improve a principal residence. You cannot use provisions of the Act for other canceled debts, and the relieved debt must be secured by the principal residence property. The Act covered debt forgiven within the calendar years of 2007 to 2016. This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.

Extension of the Mortgage Debt Relief Act

The Act initially covered a three-year period between 2007 and 2010, but was extended four times, to 2012, 2013, 2014 and then to 2016. This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.

Another way around the tax bite

If you re not covered by the special tax break for principal residences described above, there are two very important exceptions to the cancelled debt = taxable income rule.

The cancelled debt is not income, even if you receive a Form 1099-C, if

  1. You received the cancelled debt due to bankruptcy filing, or
  2. To the extent you are insolvent immediately before the cancellation of the debt.

Insolvency means your debts exceed the value of all your assets. You can exclude cancelled debt from income up to the amount that you are insolvent. For example, if you had assets of $80,000 and debt of $100,000, you are considered to insolvent by $20,000. If you had $30,000 in debt cancelled at this time of insolvency, you would have to include only $10,000 ($30,000 minus $20,000) in your income.

Cancelled debt can be a challenging tax situation especially during hard financial times. TurboTax will guide you through the cancelled debt maze, including the new legislation, and help minimize the pain from in these tough situations.

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Mortgage Interest Tax Relief #estimate #monthly #mortgage #payment


#mortgage relief

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Mortgage Interest Tax Relief

It s essential to squeeze every drop of mortgage interest tax relief out of your borrowings. Here s my short survival guide:

Pay off your Mortgage

If you have any savings use them to pay off the mortgage on your home. If you put 100 in a savings account and earn 5 interest you ll be left with just 3 after the taxman has taken his slice. But if your mortgage interest rate is 6%, you will pay 6 per year on every 100 of debt.

In other words you pay twice as much interest as you earn on identical sums of money.

If your mortgage interest rate increases to 7%, any extra house repayments you make will be equivalent to earning 12% from a savings account. There isn t an account alive that offers such a high guaranteed return!

Buy-to-let Mortgage Interest Tax Relief

It s better to pay off the mortgage on your home first because that interest is not tax deductible. Paying off a buy-to-let mortgage isn t quite so attractive because the interest qualifies for tax relief.

However, reducing your buy to let mortgages can be the best strategy if the interest rates are very high or having a lower loan to value ratio secures you a better deal when you refinance.

The fact interest is tax deductible may not matter much if you re making rental losses anyway.

Is my Interest Tax Deductible?

Property investors are often unsure whether their interest is deductible. This depends on how the money is used. Use it to buy investment property and the interest is tax deductible. Use it for personal reasons and the interest is not deductible.

There is an exception to this rule: you can generally remortgage an investment property up to its original purchase price and the interest will be tax deductible, whatever you use the money for. For example, let s say you bought a buy-to-let for 100,000 and the current mortgage is 60,000. You can borrow up to another 40,000 (if the bank will let you!) and all the interest will be tax deductible, no matter how you use it.

Using a Property Company to Save Tax

With rental income insufficient to pay borrowing costs, using a company is one way of getting the taxman to completely fund your rental losses.

For example, let s say Gordon and Alistair each borrow 1 million and pay 80,000 interest. Gordon invests personally and earns a rental profit of 70,000 before interest. After deducting interest costs he s left with a rental loss of 10,000 which he can only carry forward.

Alistair lends his borrowed funds to his property company and its properties also yield a rental profit of 70,000. Corporation tax at 22% comes to 15,400.

Meanwhile, Alistair personally claims interest relief for 80,000. This will produce a tax repayment of 32,000 ( 80,000 x 40%). Alistair and his company receive an overall tax refund of 16,600 ( 32,000 – 15,400).

Remarkably, this net refund actually exceeds the overall deficit of 10,000 on the company s property portfolio. In other words, Alistair s interest relief has turned an effective loss before tax of 10,000 into an effective profit after tax of 6,600 ( 16,600 – 10,000).

The Government is therefore effectively funding Alistair s property portfolio and adding a little extra too!


Short sale tax break on verge of being extended until 2017 #reverse #mortgage #lenders


#mortgage relief act

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Short sale tax break on verge of being extended until 2017

Homeowners who had short sales in 2015 are about to get big break on their taxes, thanks for a massive federal spending bill that s about to be signed into law by President Obama.

The Mortgage Debt Forgiveness Act was set to expire at the end of 2015, and without an extension, any mortgage forgiveness achieved in a short sale would have been counted as income for homeowners whom banks allowed to sell their homes for less than the amount of their mortgage during 2015.

But an extension to the Mortgage Debt Forgiveness Act was included in the fiscal 2016 federal appropriations and tax relief bill, which passed both the House of Representatives and the Senate on Friday.

The bill is now awaiting the signature of President Obama, who reportedly will sign the bill into law on Friday, meaning that borrowers who had short sales in 2015 are about to be able to breath a little easier.

This is not the first year that the extension of the short sale tax break has come right down to the wire. Last year, President Obama signed the 2014 version of the short sale tax break on Dec. 29.

But what s different in this year s version of the short sale tax break applies not only to short sales that took place in 2015, but it also extends the short sale tax break to cover any short sales that take place in 2016 as well.

Previous extensions of the short sale tax break only covered short sales during the previous year, leaving many homeowners wondering if they were going to get stuck with a massive tax bill.

While last year s short sale tax break was in Congressional limbo, a report from RealtyTrac estimated that in the first three quarters of 2014, there were more than 170,000 short sales representing a mortgage debt forgiveness of $8.1 billion total.

The average short sale has a mortgage forgiveness of about $75,000, which if the tax break expired would be counted as income.

RealtyTrac also estimated that the potential taxes on the average short sale to be $22,114, which would have brought the total tax liability to $2.7 billion.

But that didn t happen last year, and it s now one step away from not happening in 2015 or 2016.

This month in
Housing Wire magazine

The winners of our Insiders award are people who get things done, who are known throughout their companies as the “go-to” person in their department or division. They provide expertise in areas as diverse as operations, compliance and client services, but also have a reputation for going above and beyond their assigned roles to help out their colleagues, their companies and their clients.

Feature

In May of 2016 Airbnb had almost 1.4 listings on the site and raised its revenue projection for this year to more than $900 million. But the site impacts more than just hotel chains. As more investors, not just homeowners, use the site to rent out spare rooms — and even spare couches — it strains the supply of rental houses.

Commentary

A funny thing happened while the mortgage process became more automated. Rather than reduce human interaction, which some skeptics anticipated, automation technology is in fact having the opposite effect. It is enabling mortgage lending to become a people-first business once again.

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Tax Planning for Owning a Second Home-Kiplinger #mortgage #claculator


#mortgage tax deduction

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Tax Planning for Owning a Second Home

If you are in the market for a second home, congratulations! Not only can you look forward to having a place to relax, you also can garner some tax benefits for that place in the mountains or at the beach. You can use several tax breaks:

See Also: Tax Planning for Life’s Major Events

Mortgage Interest

If you use the place as a second home — rather than renting it out as a business property — interest on the mortgage is deductible just as interest on the mortgage on your first home is. You can write off 100% of the interest you pay on up to $1.1 million of debt secured by your first and second homes that was used to acquire or improve the properties. (That’s a total of $1.1 million of debt, not $1.1 million on each home.) The rules that apply if you rent the place out are discussed later.

Property taxes. You can deduct property taxes on your second home, too. In fact, unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes you own.

If You Rent the Home

Lots of second-home buyers rent their property part of the year to get others to help pay the bills. Very different tax rules apply depending on the breakdown between personal and rental use. If you rent the place out for 14 or fewer days during the year, you can pocket the cash tax-free. Even if you’re charging $10,000 a week, the IRS doesn’t want to hear about it. The house is considered a personal residence, so you deduct mortgage interest and property taxes just as you do for your principal home.

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Rent for more than 14 days, though, and you must report all rental income. You also get to deduct rental expenses, and that gets complicated because you need to allocate costs between the time the property is used for personal purposes and the time it is rented.

If you and your family use a beach house for 30 days during the year and it’s rented for 120 days, 80% (120 divided by 150) of your mortgage interest and property taxes, insurance premiums, utilities and other costs would be rental expenses. The entire amount you pay a property manager would be deductible, too. And you could claim depreciation deductions based on 80% of the value of the house. If a house is worth $200,000 (not counting the value of the land) and you’re depreciating 80%, a full year’s depreciation deduction would be $5,800. You can always deduct expenses up to the level of rental income you report.

But what if costs exceed what you take in? Whether a loss can shelter other income depends on two things: how much you use the property yourself and how high your income is.

If you use the place more than 14 days, or more than 10% of the number of days it is rented — whichever is more — it is considered a personal residence and the loss can’t be deducted. (But because it is a personal residence, the interest that doesn’t count as a rental expense — 20% in our example — can be deducted as a personal expense.)

If you limit personal use to 14 days or 10%, the vacation home is considered a business and up to $25,000 in losses might be deductible each year. That’s why lots of vacation homeowners hold down leisure use and spend lots of time “maintaining” the property. Fix-up days don’t count as personal use. The tax savings from the loss (up to $7,000 a year if you’re in the 28% tax bracket) help pay for the vacation home. Unfortunately, holding down personal use means forfeiting the write-off for the portion of mortgage interest that fails to qualify as either a rental or personal-residence expense.

We say such losses might be deductible because real estate losses are considered “passive losses” by the tax law. And, passive losses are generally not deductible. But, there’s an exception that might protect you. If your adjusted gross income (AGI) is less than $100,000, up to $25,000 of such losses can be deducted each year to offset income such as your salary. (AGI is basically income before subtracting your exemptions and deductions.) As income rises between $100,000 and $150,000, however, that $25,000 allowance disappears. Passive losses you can’t deduct can be stored up and used to offset taxable profit when you ultimately sell the vacation house.

Tax-Free Profit

Although the rule that allows home owners to take up to $500,000 of profit tax-free applies only to your principal residence, there is a way to extend the break to your second home: make it your principal residence before you sell. That’s not as wacky as it might sound. Nor is it as lucrative as it used to be.

Some retirees, for example, are selling the big family home and moving full time into what had been their vacation home. Before 2009, this had a very special tax appeal. Once you live in that home for two years, up to $500,000 of profit could be tax free — including appreciation in value during the years it was your second home. (Any profit attributable to depreciation while you rented the place, though, would be taxable. Depreciation reduces your tax basis in the property and therefore increases profit dollar for dollar.)

A few years ago, though, Congress cracked down on this break for taxpayers who covert a second home to a principal residence. A portion of the gain on a subsequent sale of the home is ineligible for the home-sale exclusion of up to $500,000, even if the seller meets the two-year ownership and use tests. The portion of the profit that’s subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit to the total time you owned it.

This can still be a great deal if you’ve owned your second home for many years before the law changed. Let’s say you have owned a vacation home for 18 years and make it your main residence in 2014. Two years later, you sell the place. Since the five years after 2008 the place was your second home (2009 through 2013) is 25% of the 20 years you owned the home, only 20% of the gain is taxed. The rest qualifies for the exclusion of up to $500,000.

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