AMT Interest Adjustment

[JohnH]

If somebody would be willing to grade my paper I'd appreciate the help on the following.

Taxpayer has $10K of first mortgage interest and $5K of second mortgage interest. There was a refinance of the first mortgage, but no "cash out" when the refinance was done, except for a couple of thousand of refi costs which were added to the principal. When the second mortgage was taken out, approx 50% of the funds were used to improve the home and the other 50% was used to clear up some consumer debt.

Taxpayer is subject to AMT, so as I understand it I must adjust out 50% of the interest on the second mortgage on line 4, Part I of the 6251 , but the other 50% of the interest on the second mortgage is still allowable. I'll also need to adjust out a small amount of the first mortgage interest due to the refi costs which were added to the first mortgage.

Do I have this right, or am I missing something?

[RJM]

John, I would do it the same way. Home equity consumer debt is added back for AMT calc's. Getting the numbers correct, ie getting the taxpayer to cough up the backup data, has been nearly impossible for me in prior years. This year, I am requiring that a schedule with the history of mortgages and use of funds be completed before I will complete the return, for all the AMT returns.

[BulldogTom]

This year, I am requiring that a schedule with the history of mortgages and use of funds be completed before I will complete the return, for all the AMT returns.

Good luck on that. When we ask about mortgage history, there are two responses:

1. Why and how much is it going to cost if I tell you the truth..

2. Huh - I don't know...

Tom

Lodi, CA

[jainen]

>>This year, I am requiring that a schedule with the history of mortgages and use of funds be completed before I will complete the return<<

I have been doing this for several years. There is simply no other way. I develop the schedule myself based on fairly general questions about the cost of improvements. So far most of the time I am able to say, "You are right near the maximum (or just a small amount over) so if you refinance again it may not be 100% deductible." Now of course they CAN'T refinance again in this market, and in fact I'm going to have to figure out what to do if FMV drops below the level of equity debt.

[JohnH]

Bob, Tom, jainen:

Thanks to each of you for the responses & the validation.

This isn't a client who would try to figure out what they needed to say and then feed me that info, but I have several who would take that approach. It's helpful to know the temperament of each client, isn't it?

[Pacun]

Am I correct?

This is true only if ALL 4 things hold true....

1.- Taxpayer is affected by AMT

2.- They refinanced

3.- they took money out when they refinanced

4.- They did not use all the money on improvements to the same home.

[BulldogTom]

Am I correct?

This is true only if ALL 4 things hold true....

1.- Taxpayer is affected by AMT

2.- They refinanced

3.- they took money out when they refinanced

4.- They did not use all the money on improvements to the same home.

Not necessarily. Remember, only 100,000 of home equity debt is deductible as qualified home mortgage interest. Out here in CA, you could have blown past that amount in a couple of years when the housing market was hot. For example, if I bought a home in Clovis CA in 1997 (5 bdrms on 2 acres with horse corrals) for about 250,000, it very easily could have been worth 600,000 in 2005. Say I refinanced for 500,000, using all of the proceeds on other than home improvements, I can only deduct the interest on 350,000 (250K acquisition debt + 100k home equity debt). This is the law regardless of AMT implications. If in AMT, then it gets worse, because no Home Equity debt is allowed.

Hope that helps

Tom

Lodi, CA

[Pacun]

Not necessarily. Remember, only 100,000 of home equity debt is deductible as qualified home mortgage interest. Out here in CA, you could have blown past that amount in a couple of years when the housing market was hot. For example, if I bought a home in Clovis CA in 1997 (5 bdrms on 2 acres with horse corrals) for about 250,000, it very easily could have been worth 600,000 in 2005. Say I refinanced for 500,000, using all of the proceeds on other than home improvements, I can only deduct the interest on 350,000 (250K acquisition debt + 100k home equity debt). This is the law regardless of AMT implications. If in AMT, then it gets worse, because no Home Equity debt is allowed.

Hope that helps

Tom

Lodi, CA

[/quote

On your example, condition number 4 was not met.

"This is true only if ALL 4 things hold true....

1.- Taxpayer is affected by AMT

2.- They refinanced

3.- they took money out when they refinanced

4.- They did not use all the money on improvements to the same home."

[BulldogTom]

On my example, number 1 was not met also - the taxpayer is not in AMT, and interest on 150K of mortgage debt is not deductible (assuming they did not improve the home).

Tom

Lodi, CA