 Refinancing
a million-dollar property
|  Dear
Tax Talk,
We want to refinance one of our
two properties to pay off an $111,000 HELOC on our primary residence.
We did the 80/15/5 in order to get the home we wanted. Our primary
rate for $570,000 is 5.85 percent. The home would appraise at about
$1.2 million. We also own a rental (appraises at $560,000) with
a payoff of $230,000 at 6.25 percent.
We would like to refinance for
the max of $1,000,000, using the equity in our home to: 1) pay off
our rental and apply the rental income to our new refinanced mortgage,
2) pay off the $111,000 HELOC and 3) use the remainder (about $75,000)
for a pool. How will the movement of our interest to a one-lump
loan of $1,000,000 affect our taxable write-off for the income we
claim for our rental?
My husband makes about $200,000
per year, which includes our rental income. Does it make that much
of a difference if I'm writing off interest on my mortgage or writing
it off as "income" from a rental property? -- Amy
 Dear
Amy,
The million-dollar limit you're referring to
is the debt limit on which home-mortgage interest is deductible
on the acquisition of your home, referred to as "original acquisition
indebtedness." Since you're refinancing, a different set of
rules apply so that the interest on the million dollars in debt
would be allocable in various parts. On the refinance of your mortgage,
you can claim on Schedule A as home-mortgage interest the amount
of interest allocated to the following:
1. The refinanced original acquisition
indebtedness of the $560,000, which I assume is the 80-percent loan.
2. The refinanced HELOC of $111,000, which I assume is the 15-percent
original acquisition indebtedness.
3. An additional $75,000 of the loan would be considered acquisition
indebtedness as it is used for the construction of the pool.
You can write off on Schedule A
of your IRS Form 1040 the interest on an additional $100,000 of
the refinance loan as a cash out even though it was used to pay
off the rental property. You could also just allocate the interest
on $230,000 of the loan to your Schedule E rental income. That decision
depends on how you maximize your deductions.
In order to get the most tax benefit
currently, you may want to allocate the interest on up to $100,000
of the refinanced loan to Schedule A where there is no limit on
its deductibility. This would be the situation if the rental is
throwing off net losses for taxes that you cannot currently claim.
On the other hand, if the rental
has net income after considering the full deduction of interest
on Schedule E, there would be no reason not to claim the full deduction
of interest on Schedule E.
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