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From: ken@nsc.UUCP (Ken Trant)
Newsgroups: net.invest,net.taxes
Subject: Re: Money from refinancing
Message-ID: <3788@nsc.UUCP>
Date: Thu, 25-Sep-86 12:25:24 EDT
Article-I.D.: nsc.3788
Posted: Thu Sep 25 12:25:24 1986
Date-Received: Fri, 26-Sep-86 00:57:41 EDT
References: <8@oliveb.UUCP>
Reply-To: ken@nsc.UUCP (Ken Trant)
Distribution: na
Organization: Real Estate Professionals, Fremont
Lines: 82
Keywords: IRS (I Retroactivly Steal)
Xref: mnetor net.invest:1199 net.taxes:589

In article <8@oliveb.UUCP> gnome@oliveb.UUCP (Gary) writes:
>What are the ramifications of "taking money out" when
>refinancing your house?
>It looks like a good way to finance major home improvements
>but I am somewhat leary about the long-term effects.
>Gary
>(allegra,ihnp4,glacier,hplabs)oliveb!oliven!gnome

           IRS: Loss of Tax Deductions for refinancing

  The IRS has thrown a major league curve to the estimated 2 million homeowners
who are refinancing this year.
  The points that lenders charge when you trade in a high-priced mortgage
are one of the major costs of refinancing. Each point is 1% of the mortgage
amount. The IRS is now telling taxpayers that points may not be deducted 
in the year they are paid. That position can easily cost you $1000.00 or
more in higher taxes if you refinance this year.
  Until its announcement in May, the IRS had not addressed the
points-on-refinancing issue officially. In the absence of any IRS guidance
to the contrary most advisers assumed that points for refinancing a principle
residence (as opposed to a vacation home or rental property) fell in 
the deductible category. But now the IRS says that assumption was wrong.
  The loss to the Treasury last year(also known as tax savings to homeowners)
was about $450 million, but demanding that the taxpayers write off refinancing
points in a little bit at a time over the years could be a Billion dollar 
decision for the IRS.
  That's not only costly for those who refinance this year and in the future
but it also raises questions for the 750,000 homeowners who refinanced in
1985.  The IRS is quick to point out that points on refinancing are still
deductible, just not all at once in the year you pay them. Instead this
expense is considered prepaid interest to be written off over the life of
the loan.
  Assume you pay 2.5 points on a $150,000, 30-year mortgage to refinance 
your home.  With each point equaling 1% of the mortgage amount, your 
out-of-pocket cost comes to $3,750. Someone in the 42% tax bracket who 
deducted the full amount would save $1,575 in taxes.
  The IRS says that you deduct points over the life of the loan:
one-thirtieth each year, for a paltry 1986 deduction of $125. In the 42%
bracket, that saves just $52.50. And you have to prorate it for the year;
if you refinance in July, you could deduct just one-half of the first 
one-Thirtieth of the interest.
                    Home Improvements:
   That's just the beginning of the complications. If you refinance for 
more than the balance of your mortgage and use the extra cash for home 
improvements, you have to split the points for tax purposes. If 15% of
the new mortgage goes for improvements, for example, 15% of the points can
be deducted in the year of the refinancing, with the other 85% deducted in
little chunks over the life of the loan.
   In the year you pay off the mortgage, either because you sell the house 
or refinance it again, any part of the points not yet deducted can be 
written off in a lump sum.
  Since there is generally a correlation between the interest rate 
and the number of points charged: lower rates usually mean higher points,
and vise versa. The loss of immediate deductibility will require you to
take a closer look at the advantage of putting up extra cash in points to 
capture a lower rate.
What Now ???:
  What do you do now if you deducted all your points for your refinance
in 1985?. The advice varies, the IRS would like you to file an amended
return and pay the taxes due, But advice to the contrary is comming from
several sources. Larry Axelrod, a CPA with the Washington office of Touche
Ross, recommends against an amended return. When 1985 returns were filed 
claiming the deduction, the accountant argues, the taxpayers were filing 
honestly and reasonably. A CPA with another national accounting firm that
had recommended claiming the deduction said he wouldn't advise clients to
amend their returns.
  If you don't amend your return and it is audited, a deduction for
points paid for refinancing will be disallowed, according to Ellen Murphy, 
assistant to the IRS commissioner for public affairs. In that case you'd
be assessed the extra tax, plus interest,( the current IRS rate is 9%).
Auditing of 1985 returns is one to three years away.
  Experts say there's almost no chance you'd be hit with a negligence
penalty for claiming the deduction on your 1985 return. After all,
there was no clear guidance from IRS and prevailing advice was that
the write-off was permissible
  Currently legislation to reverse the IRS position on points has been
introduced on Capital hill.

Sincerly
Ken Trant
Real Estate Professionals
415-651-3131