Ask the tax adviser
equity loan deductions and tax consequences of a co-op apartment
Limits on home equity loan
Dear Tax Talk:
I am confused about the limit on deductions for home equity loans.
If I have no mortgage and my home is valued
at $500,000, can I only deduct interest on the first $100,000 of
an equity loan, or is the interest deductible up to the home's full
value of $500,000?
You're only confused because the law is confusing. Interest on home
mortgages (either a first or second home) is deductible when the
mortgage falls within certain loan limits and is incurred either:
- For the purchase or improvement of the home
(home acquisition debt), or
- Refinancing of an existing mortgage on the
home (refinanced home acquisition debt), or
- An equity borrowing regardless of the purpose
(home equity debt).
The total amount that you can treat as home
acquisition debt on a first and second home is $1 million ($500,000
if married filing separately). That is the loan amount, not interest
paid. If you do not take out a mortgage to buy the home but do so
within 90 days of buying the home, you can treat that debt as home
acquisition debt up to the cost of the home plus improvements. Similar
rules apply if you build the home and include the costs within 24
months before the date of the mortgage.
You can refinance existing home acquisition
debt up to the principal balance of the existing debt plus the cost
of improvements made within 24 months of the date of the debt. In
most cases, the date that you apply for the mortgage will be considered
the date of the mortgage and not the actual date it is recorded.
The existing principal and improvements must fall within the $1
If you exceed the $1 million, the interest on
that portion of the debt over $1 million is not deductible as home
acquisition debt, but it may be deductible as home equity debt up
to the limits in that category.
Home equity debt is debt incurred for reasons
other than to buy, build or improve your home and can include home
acquisition debt in excess of the $1 million. Total home equity
debt on your main home and second home is limited to the smaller
- $100,000 ($50,000 if married filing separately),
- The total of each home's market value reduced
by the home acquisition debt.
If your home mortgage debts are over $1.1 million
or you have debt incurred prior to Oct. 13, 1987 (the date the law
got real confusing), you should review Internal Revenue Service
936, Home Mortgage Interest Deduction.
In your case Bruce, if you did not recently
buy the $500,000 home, you will only be able to claim interest deductions
on up to $100,000 in home equity debt.
Co-op sale tax consequences
Dear Tax Talk:
I am presently thinking of selling my co-op in New York City and
moving to San Diego.
If I purchased my co-op for $125,000, sold it
for $360,000 and bought a new home in San Diego for $250,000, what
are my tax burdens?
How do these get calculated?
A cooperative differs from home or condominium ownership in that
a co-op owner owns stock in a corporation that entitles the owner
to occupy an apartment in the building. For most purposes of the
tax law, a co-op owner is treated the same as a home or condominium
owner and is entitled to the same deductions as a homeowner and,
if otherwise eligible, qualifies for the gain exclusion upon the
sale of the property.
Upon the sale of the property you are eligible
to exclude $250,000 in gain if you have owned the stock and lived
in the apartment as your main home for at least two years. If the
move is job or health related and you don't meet the two-year rule,
you are eligible for a partial exclusion. For more information,
see my column on home
sale proceeds and Internal Revenue Service Publication
523, Selling Your Home.
Since New York tax laws are quite comprehensive,
you may want to discuss the state
and city rules with their respective taxation departments.
-- Posted Sept.