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Home Ownership AcceleratorHome Ownership Accelerator
02-04-10
Copyright 2005-2010, CMG Mortgage, Inc. All rights reserved....
Home Ownership Accelerator
2
Tax QuestionsTax Questions
Topics:
1. How interest is paid and reported.
2. Why losing a tax ...
Home Ownership AcceleratorHome Ownership Accelerator
3
Handling Tax QuestionsHandling Tax Questions
• First things first:
...
Home Ownership AcceleratorHome Ownership Accelerator
4
Review: HOA Interest RateReview: HOA Interest Rate
• Based on the W...
Home Ownership AcceleratorHome Ownership Accelerator
5
HOA Interest Payments and ReportingHOA Interest Payments and Report...
Home Ownership AcceleratorHome Ownership Accelerator
Payment TimelinePayment Timeline
6
SEPTEMBER OCTOBER
Fri Sat Sun
28 2...
Home Ownership AcceleratorHome Ownership Accelerator
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Oh No! I’ll lose my interest tax deduction!Oh No! I’ll lose my inte...
Home Ownership AcceleratorHome Ownership Accelerator
Bedtime Reading! IRS Pub 936.Bedtime Reading! IRS Pub 936.
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Home Ownership AcceleratorHome Ownership Accelerator
9
So, What does Pub 936 Say About The HOA?So, What does Pub 936 Say A...
Home Ownership AcceleratorHome Ownership Accelerator
10
Why Not?Why Not?
Answer:
– IRS doesn’t care what kind of loan is u...
Home Ownership AcceleratorHome Ownership Accelerator
11
What to do? Apply the Rules.What to do? Apply the Rules.
The IRS a...
Home Ownership AcceleratorHome Ownership Accelerator
Deductibility LimitsDeductibility Limits
• Acquisition debt
– $1 mill...
Home Ownership AcceleratorHome Ownership Accelerator
HOA is 2 kinds of Debt, in One Loan.HOA is 2 kinds of Debt, in One Lo...
Home Ownership Accelerator
14
Basic ExampleBasic Example
Original loan: $400,000
Pay down to: $200,000
Redraw: $50,000 (bo...
Home Ownership AcceleratorHome Ownership Accelerator
15
Remember! The same rules applyRemember! The same rules apply
$400K...
Home Ownership AcceleratorHome Ownership Accelerator
Tax TimeTax Time
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Simple tax deductibility example:
Original Purcha...
Home Ownership AcceleratorHome Ownership Accelerator
17
Meet the AccountantMeet the Accountant
• Get the tax accountant co...
Home Ownership AcceleratorHome Ownership Accelerator
18
The Bottom LineThe Bottom Line
• Interest payments on a first-posi...
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CMG HOA Handling Tax Deductibility

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CMG HOA Handling Tax Deductibility

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CMG HOA Handling Tax Deductibility

  1. 1. Home Ownership AcceleratorHome Ownership Accelerator 02-04-10 Copyright 2005-2010, CMG Mortgage, Inc. All rights reserved. Home Ownership Accelerator , the yellow flying house logo, and other marks are registered trademarks of CMG Financial Services, Inc. Content and concepts presented here are proprietary information which is made available for the sole purpose of training and educating CMG-approved agents, and is non- transferrable, non-distributable, and may not be copied or repurposed. Any other use outside CMG=approved educational efforts is unauthorized, except with the express written permission of CMG Mortgage Inc. CMG Home Ownership AcceleratorCMG Home Ownership Accelerator®® Sales TechniquesSales Techniques HOA Tax DeductibilityHOA Tax Deductibility
  2. 2. Home Ownership Accelerator 2 Tax QuestionsTax Questions Topics: 1. How interest is paid and reported. 2. Why losing a tax deduction can be a good thing 3. How the IRS views interest deductibility
  3. 3. Home Ownership AcceleratorHome Ownership Accelerator 3 Handling Tax QuestionsHandling Tax Questions • First things first: – Remind everyone (including yourself): You are not a tax advisor! – Recommend strongly that the client involve a tax advisor (usually their accountant) to discuss tax implications.
  4. 4. Home Ownership AcceleratorHome Ownership Accelerator 4 Review: HOA Interest RateReview: HOA Interest Rate • Based on the Wall Street Journal 1-mo LIBOR index • Published on last business day of month • Applies for the next statement period • Fully-indexed rate = 1-mo LIBOR index + margin • Maximum rate = starting fully-indexed rate + 6% • Minimum rate = 3.5% • (Day’s ending balance) x (%Rate/365)
  5. 5. Home Ownership AcceleratorHome Ownership Accelerator 5 HOA Interest Payments and ReportingHOA Interest Payments and Reporting Key facts: • Interest is calculated based on your daily principal balance. • Posted to statement on last business day of month. • Payment is due 25 days later. • Payment (interest + any principal due) is made from available equity if no deposits and equity is available. • No deferral or neg am like option ARM: lender gets paid • The lender issues a traditional 1098 statement for all the interest paid.
  6. 6. Home Ownership AcceleratorHome Ownership Accelerator Payment TimelinePayment Timeline 6 SEPTEMBER OCTOBER Fri Sat Sun 28 29 30 1 2 3….. 23…14 15 16… Statement Date Last business day Payment Date 25 days later Next period’s rate: 1-month LIBOR Wall Street Journal on last business day of month
  7. 7. Home Ownership AcceleratorHome Ownership Accelerator 7 Oh No! I’ll lose my interest tax deduction!Oh No! I’ll lose my interest tax deduction! • Problem: Less interest paid, lower deduction • Sales Point: Interest is not in your best interest! – Better to pay less interest (save $3) than get deduction (get $1 back) – Want larger tax deductions? Get a higher rate! – Interest is still deductible while you have the loan – Example: • Typical $300,000 in interest – Deduction $100,000, net cost of $200,000 • HOA $150,000 in interest – - Deduction $50,000, net cost of $100,000
  8. 8. Home Ownership AcceleratorHome Ownership Accelerator Bedtime Reading! IRS Pub 936.Bedtime Reading! IRS Pub 936. 8
  9. 9. Home Ownership AcceleratorHome Ownership Accelerator 9 So, What does Pub 936 Say About The HOA?So, What does Pub 936 Say About The HOA? Nothing in particular.
  10. 10. Home Ownership AcceleratorHome Ownership Accelerator 10 Why Not?Why Not? Answer: – IRS doesn’t care what kind of loan is used. – IRS only cares about • Are you filing a 1040 and itemizing? • Is it secured debt? • Is it a qualified residence (main home or second home)? • What did you do with the cash?
  11. 11. Home Ownership AcceleratorHome Ownership Accelerator 11 What to do? Apply the Rules.What to do? Apply the Rules. The IRS allows deductibility on two forms of home loan debt: • Acquisition debt – used to buy or improve a home. • Home equity debt – used for other purposes: – Debt consolidation – Car, travel, tuition or other expense
  12. 12. Home Ownership AcceleratorHome Ownership Accelerator Deductibility LimitsDeductibility Limits • Acquisition debt – $1 million (married, filing jointly) – Acquisition or improvement • Home equity debt – $100,000 – Non-acquisition, non-improvement – NOT to be confused with the term “HELOC”!!! 12
  13. 13. Home Ownership AcceleratorHome Ownership Accelerator HOA is 2 kinds of Debt, in One Loan.HOA is 2 kinds of Debt, in One Loan. • Acquisition debt: – Purchase/refi – Usually is payoff amount of prior loan. – Borrower “retires” acquisition debt by depositing into HOA • Home equity debt: – Redraws against HOA line – Causes balance to go up – Using equity – For non-improvement expenses (groceries, gas, bills, etc.) 13 $400 K $390 K
  14. 14. Home Ownership Accelerator 14 Basic ExampleBasic Example Original loan: $400,000 Pay down to: $200,000 Redraw: $50,000 (boat) New balance: $250,000 Redraw: $50,000 (car 1) New balance: $300,000 Redraw: $50,000 (car 2) New balance: $350,000
  15. 15. Home Ownership AcceleratorHome Ownership Accelerator 15 Remember! The same rules applyRemember! The same rules apply $400K $200K Pull $300K out (only $100K is deductible as home equity debt, unless used for improvements) $500K New acquisition debt basis ($200K deductible) Orig. acquisition debt basis Same tax deductibility: -First + HELOC -Cashout refi (Flags beginning in 2010) -Home Ownership Accelerator Only difference: -HOA: Single loan!
  16. 16. Home Ownership AcceleratorHome Ownership Accelerator Tax TimeTax Time 16 Simple tax deductibility example: Original Purchase Price (1/1/07): $700,000 Original HOA Line Amount (1/1/07): $550,000 Original Acquisition Debt (1/1/07): $400,000 Home Equity Draw (buy yacht, on 1/1/07): $140,000 Starting balance on 1/1/07: $540,000 Regular principal payments of$20,000/mo Principal Acquisition H.E. Interest 1098 Deductible Deductible 1098 Balance Debt Debt Rate Interest Balance Interest Adjustment Jan $540,000 $400,000 $140,000 5.5% $29,700 $500,000 $27,500 ($2,200) Feb $520,000 $400,000 $120,000 5.8% $30,160 $500,000 $29,000 ($1,160) Mar $500,000 $400,000 $100,000 6.0% $30,000 $500,000 $30,000 $0 Apr $480,000 $400,000 $80,000 6.0% $28,800 $480,000 $28,800 $0 May $460,000 $400,000 $60,000 5.9% $27,140 $460,000 $27,140 $0 Jun $440,000 $400,000 $40,000 5.7% $25,080 $440,000 $25,080 $0 Jul $420,000 $400,000 $20,000 5.5% $23,100 $420,000 $23,100 $0 Aug $400,000 $400,000 $0 5.5% $22,000 $400,000 $22,000 $0 Sep $380,000 $380,000 $0 5.5% $20,900 $380,000 $20,900 $0 Oct $360,000 $360,000 $0 5.8% $20,880 $360,000 $20,880 $0 Nov $340,000 $340,000 $0 5.9% $20,060 $340,000 $20,060 $0 Dec $320,000 $320,000 $0 6.0% $19,200 $320,000 $19,200 $0 $297,020 $293,660 ($3,360)
  17. 17. Home Ownership AcceleratorHome Ownership Accelerator 17 Meet the AccountantMeet the Accountant • Get the tax accountant comfortable with this new concept. – Avoid misunderstandings that could delay or derail a loan funding. • Build a bridge to a new referral source.
  18. 18. Home Ownership AcceleratorHome Ownership Accelerator 18 The Bottom LineThe Bottom Line • Interest payments on a first-position HELOC (like the Accelerator) are as deductible as any other first-loan interest. • Don’t let the name “Home Equity Line” confuse the issue. • Keep the focus on how the cash-flow benefits of this loan can help the client.

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