The Tax Benefits of Refinancing

Many people refinanced their mortgages in 2011 to take advantage of super-low interest rates. If you refinanced last year, here's how to make sure you claim all your rightful deductions on your 2011 return.

Deducting Your Mortgage Interest

Say your original mortgage was $200,000. On July 1, 2011, you took out a new 30-year, $300,000 mortgage and paid 1 1/2 points, or $4,500, for the privilege. (Each point represents 1% of your total loan amount.) You then used the extra $100,000 from the new mortgage to eliminate some high-interest credit-card bills, pay off your car loans and cover various other expenses.

Assuming your home was worth at least $300,000 when you refinanced, you have, in effect, two new mortgages as far as the Internal Revenue Service is concerned. The first $200,000 of your new loan (the balance on your old mortgage when you paid it off) is treated as "home-acquisition debt." And the interest on this qualifies as an itemized deduction on line 10 of your Schedule A.

The remaining $100,000 of your new loan is treated as home-equity debt. The interest on this should also qualify as an itemized deduction on line 10 of your Schedule A. But keep one thing in mind: The IRS only recognizes home-equity loans up to $100,000; you can't deduct the interest paid on principal above that figure.

Also, if the home-acquisition debt plus the home-equity debt exceeded the fair-market value of your home, you generally can't deduct the interest on the excess debt. Say your home was worth $240,000 when you took out that new $300,000 loan. You can deduct the interest on the $200,000 of acquisition debt. However, for the home equity debt, you can only deduct the interest on $40,000. So you can deduct 80% ($240,000/$300,000) of the total mortgage interest on line 10 of your Schedule A. (The interest on the remaining $60,000 of debt is generally considered a nondeductible personal expense, though there are a couple of exceptions, like if you used the loan proceeds to finance your small business.)

Talking Points

You can also amortize the points related to the home-acquisition-debt part of the new loan ($3,000 in our example) over the life of the loan. Say it's a 30-year loan (360 months). Your amortization deduction would be $8.33 a month ($3,000 divided by 360), for a grand total of $99.96 a year. Every little bit helps, right?

What about the points related to the home-equity debt ($1,500 in our example)? You can amortize those in the same proportion as the interest, provided that the home-equity debt is $100,000 or less, and the home's value isn't less than the home-equity debt plus the acquisition debt. Claim the amortization write-off for your home-mortgage points on line 10 or 12 of Schedule A.

This brings us to our last potential deduction. If you previously refinanced your mortgage and paid points, you probably have a good-sized unamortized (or not-yet-deducted) balance for those points. You can generally deduct that entire unamortized amount when you refinance again. For example, say the mortgage you refinanced last year was taken out in a previous refinancing deal done six years earlier, back in 2005. At that time you paid $2,000 in points for your 30-year loan. You should have $1,600 worth of unamortized points left over from the 2005 loan (80% of the original $2,000 amount). On your 2011 return, don't forget to deduct the $1,600 of unamortized points. Claim your write-off on line 12 of Schedule A.

New 2012 Real Estate Laws Protects Homeowners, Buyers, Tenants -Part 1

New 2012 laws that took effect as of January 1, 2012.

Condo Rentals: Starting Jan. 1, owners of units in a common-interest development , usually a condominium, must be allowed to rent or lease their units unless it was restricted before they took ownership. Senate Bill 150 was designed to counter new homeowner association rules put in place to stem the tide of tenant-occupied properties. It does not apply to rental restrictions prior to Jan 1. Condo owners must provide to their HOA proof of their purchase date and contact information for their tenants. And certain changes of title, probate, spousal, parent-to-child, adding a join tenant, and other transfers exempt from property tax reassessment, do not reset the date of ownership.

Plans to help responsible homeowners?

President Obama details plan to help responsible homeownersIn his State of the Union address, President Obama laid out a plan to help responsible borrowers and support a housing market recovery.
Key aspects of the president’s plan include:

• Broad-based refinancing: The president’s plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates
• Homeowner Bill of Rights: The president is putting forward a single set of standards to make sure borrowers and lenders play by the same rules, including: Access to a simple mortgage disclosure form, so borrowers understand the loans they are taking out; full disclosure of fees and penalties; guidelines to prevent conflicts of interest that end up hurting homeowners; support to keep responsible families in their homes and out of foreclosure; and protection for families against inappropriate foreclosure, including right of appeal.
• First pilot sale to transition foreclosed property into rental housing: The FHFA, in conjunction with Treasury and HUD, is announcing a pilot sale of foreclosed properties to be transitioned into rental housing.  C.A.R. is opposed to bulk sales of REO properties in California. 
• Providing a full year of forbearance for borrowers looking for work: Following the administration’s lead, major banks and the GSEs are now providing up to 12 months of forbearance to unemployed borrowers.
• Pursuing a joint investigation into mortgage origination and servicing abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis under the leadership of federal and state co-chairs.
• Rehabilitating neighborhoods and reducing foreclosures: In addition to the steps outlined above, the administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity, and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild.

Parents Act as Kids' Mortgage Lender

Daily Real Estate News | Thursday, February 02, 2012

The tightened lending standards are keeping a lot of young professionals on the sidelines in home buying today. That’s where more parents are stepping in.

More parents are taking on the role as mortgage lenders to help their kids take advantage of low home prices and record-low mortgage rates. In fact, one in three first-time home buyers either received a gift or loan from their families for a home purchase made in 2011, according to National Association of REALTORS®’ research.

But parents who enter into a gift-giver or mortgage lender role need to make sure they follow some tax guidelines.

For one, the federal government has rules on how much you’re allowed to gift. For 2012, individuals can give up to $13,000 tax free in one year without having to pay gift taxes. Married couples can give up to $26,000 a year.

Some parents, instead of providing a gift, are acting more as a mortgage lender. They can set up an arrangement where they charge interest on the money they lend, but the interest charged must be based on the IRS’s “applicable federal rate” minimum for various loan maturities. Still, those rates are even far below today’s record-low mortgage rates (anywhere from 0.19 percent or even less for three-year loan terms to 2.63 percent for nine-year loan terms).

Parents will need to pay income taxes on any interest earned on the loans. Still, the return may be better than what they can get for a low-interest CD or money market fund nowadays. As for the children, they’ll still be able to deduct the interest on their taxes for the mortgage interest deduction if these agreements are formally structured.
Source: “Become Your Kid’s Mortgage Lender,” Fortune (February 2012)