Mortgage Interest Tax Question

[2244opensky]

Hi,

I had a question regarding mortgage interest being refunded in your taxes. I understand one of the benefits of being a homeowner/real estate investor is that the interest would be refunded upon tax time. I was told by my tax advisor that this benefit is phased out based on your AGI. Ours is in the 170,000 range as of last years taxes, he stated that because ours was too high the only way we can get any benefits is when we sell (thus, it would be best to stick with him because they accumulate each year and he said he was keeping track of our aggregrate tax benefits). Is this true? I always thought our tax liability would be less since we have a house and two investment properties but it appears as if this is not the case. Is there any IRS guidance I can refer my tax advisor to?

[Socal104]

I'm not a tax advisor, but benefit from both the home interest deduction and the real estate deduction. To be clear, for the home, you are allowed to add your interest and property taxes to your itemized deductions. It will only have a benefit if your itemized deductions are greater than your standard deduction. At your income level though, if you live in a state with income taxes and have any sized mortgage, you probably qualify. Interest on a mortgage is deductible up to a $1MM mortgage and you can deduct HELOC interest up to $100,000 principal. The real issue for you is if you hit up against AMT, but I can't imagine that you aren't going to get some benefit between your mortgage interest and property taxes. You have good income but wealthy people even get the mortgage interest deduction.

For the investment property, you didn't say whether you have any income coming from the property, which I would hope you would have. The mortgage interest, taxes, and other deductions plus depreciation would be an offset to your income. However, if you have no income, you can't take a loss unless you happen to have Modified AGI of less than $100K. Rental income is considered passive income unless you happen to meet certain conditions. If your income is less than the $100K then you could take up to $25K in losses against your non-passive income. So if that's what your tax advisor meant because you have losses, then I can understand what he/she meant.

If you have the kind of income and properties that you are referring to, you really need to spend some time looking at the tax code. Google "taxes on rental property income" and you'll get some of the IRS regs. Just a viewpoint, running investment properties without any income is a terrible investment. In this market, you are likely to wait years before you ever recover your investment unless you happen to be actively engaged in snapping up foreclosures, fixing them up, and selling them.

Another useful exercise is to use Turbotaxes free online program to get used to what questions you get asked and what happens with changes in income.

Again, there are probably better tax advisors out there, but this should set you in the right direction.

SoCal

[Silver purse gal]

Is your "tax advisor" a Certified Public Accountant? There is a certain educational standard and ethics involved with that certification that can give you some peace of mind that you're probably getting the right advice. You don't have to "stick with" a tax preparer just because he has the records. Your previous tax returns and the working papers for them should be returned to you if you decide to go to someone else. Any new tax preparer will have the same records the previous one had. I'm not a tax person and not advocating you change, but it sounds strange that you were told you wouldn't get the benefit from a mortgage deduction. As Socal104 said, when your itemized deductions exceed your standard deduction, you take the higher deduction, which includes your mortgage interest. You could try wading into the IRS.gov site to look up mortgage interest deductions. Or you could get a second opinion from a CPA.

[TaxSaver]

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[demetriusalwyn]

Most states use the federal tax return to determine your tax liability. Therefore, most deductions, such as mortgage interest, that are deductible on your federal return are deductible on your state return. In layman's terms, the deduction on your federal tax return for mortgage interest carries on through your CA tax return.

[Xin Lu]

If you have investment properties that has rental income you can write off the mortgage interest on those against the income you get because it is technically an expense. On your residence or second homes you can deduct interest on mortgages worth up to $1 million. Perhaps your mortgage is too large? Another reason why mortgage interest deduction won't benefit you is if the interest you pay is too small and add up to less than your standard deduction. Another issue is the AMT, but I don't know if you actually hit the AMT with AGI 170,000. It's very likely, though. I'm not a tax advisor, but the publication from the IRS you would want to read is this one: http://www.irs.gov/publications/p936/index.html