Your Questions About Mortgage Refinancing Tax Deduction

Charles asks…

is it possible to lower your mortgage payment without refinancing ??

I would like to put the needed amount of escrow payments into my mortgage company’ escrow account to pay my taxes for a year and lower my mortgage payment by the monthly { tax ] deduction ,, Is this possible ?
sorry,, I should have said that I am trying to eliminate the monthly deduction….

John answers:

NO YOU NEED TO REFINANCE THE WHOLE THING OR TAKE AN EQUITY LOAN OUT AGGAINST THE MORTGAGE .

William asks…

Can I give a loan to my LLC for a tax deduction?

I purchased income property and put it in a LLC. Instead of getting a mortgage for the income property, I refinanced my house, took out cash, and paid for the income property in cash. I sold the house I refinanced 2 months later. Can I show a personal loan to the LLC for the mortgage I had on my house, so I can deduct the interest on my tax return for the LLC since I used my personal funds to buy the LLC?

John answers:

Talk to an accountant before acting on any advice you read here.

To recap what I believe you said, for clarification purposes:

1) You refinanced your house, and took cash out of your equity.
2) You used this cash to form an LLC, and invested it as your initial capital
3) Your LLC purchased a piece of income property for cash
4) You later sold your house, and paid off all outstanding liens against it

Basics:
1) Your LLC is a separate legal entity from your person
2) You own 100% of the LLC

You want to charge interest to the LLC for tax purposes.

You could do this, but it won’t help you. Since you are 100% owner of the LLC, it would work like this:

1) LLC pays you $10,000 (example) in interest and takes a tax deduction
2) LLC gives you a 1099-INT reporting the interest it paid to you
3) You pay tax at regular income tax rates on the interest that you received from the LLC
4) End of year, LLC reports your share of income less the $10,000 in interest expense to you.

If you run the LLC as a corporation, and it is subject to corporate income taxes, you have accomplished the following:

1) Reduced the corporate income tax liability by $10,000
2) Increased your personal income tax liability by $10,000
3) Reduced your dividend by $10,000
4) Made a lot of extra work for yourself for a negligible tax savings.

Corporate taxes are higher than personal taxes, but I think that you would be hard-pressed to structure this in any way the benefits you. In fact, the mere accounting work of keeping up with the transaction and reporting it everywhere would likely generate fees far in excess of any tax savings.

I would not recommend that you run the LLC as a corporation anyway, because there is no real benefit to doing things this way. If you wanted to do all the extra paperwork and pay taxes, you should have set it up as a corporation.

If you don’t run the LLC as a corporation, which I assume you really do not, all income and expenses flow through to your personal Schedule C anyway, so there is no benefit to charging your LLC interest.

In short, if you move your wallet from your right pocket to your left pocket, have you made any money? If a CPA charges you to track the movement of your wallet, have you benefitted?

That’s the crux of what you are asking.

Betty asks…

I am refinancing my 3 yr. arm mortgage & getting a fixed rate mortgage.?

I am refinancing to a fixed rate mortgage from a 3 yr. ARM. I have $16,825.37 in unpaid deferred interest. A mortgage broker told me this amount can be used either as an income tax deduction or to add to the principle of my new mortgage. I don’t understand the concept of this at all. I would like someone to explain this better.

John answers:

The “unpaid deferred interest” accumulated as part of your 3 yr ARM. There must’ve been some provision where the interest was charged but not required to be paid off right away, making your monthly payment more affordable. Now, as you’re closing out that loan, the interest needs to be paid off. Guess, if your house had appreciated enough, it would’ve covered the amount in a refi. But that’s not the case here.

So there are three things you could do:

1) Pay the entire amount of interest. That amount paid will then be found on your Form 1098 at the end of the year as paid mortgage interest, which you can deduct from your federal income taxes. I highly doubt you have almost $17k lying around that you can use to pay off the interest now. If you do, though, then it would be best to apply it now.

2) Roll the entire interest owed amount into your new mortgage. That will increase your principal, meaning you’ll be paying it down over the life of the loan, but at least you don’t have to pay it right now.

3) Pay part of that interest now, and roll over the remaining amount into the principal of the loan. It’s a little of 1) and 2). And you’ll have to figure out what amount you can afford to pay right now w/o finding yourself in a cashflow bind later on.

Good luck.

Helen asks…

Mortgage Purchase/Refinance and Filing Taxes?

If we bought the house this year and then refinanced within the same year (for a rate reduction only); do we get to use both settlement figures for the tax deductions? I know there are certain allowable deductions when purchasing or refinancing — but can they both be used in same year’s taxes?

John answers:

You can only deduct mortgage interest (interest from your monthly payments and pre-paid interest from your settlement costs) as well as property taxes. You cannot deduct any miscellaneous garbage fees.

You can deduct points as they are considered pre-paid interest too. While you can fully deduct all points from your original mortgage, you MUST amortize points from your refi over the next 30 years–you cannot deduct refi points all at once.

Thomas asks…

If I refinance my mortgage and “cash out” an additional amount, can I still deduct the entire interest?

Can I take the entire interest payment as a tax deduction? I was wondering since some of that interest is, in essence, not paying for the mortgage amount, but instead is paying for the cash out amount.

John answers:

If you borrow against your house and you do not use the money to buy, build, or improve your house, this debt is called “nonacquisition debt.”

Interest on nonacquisition debt is generally limited to the interest on $100,000 of such debt on your principal residence.

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