Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




Mortgage Tax Question...HELP

Reply to topic
Money Talk > Taxes

Author Thread
bim94
New Member


Cash: $ 1.55

Posts: 7
Joined: 19 Jan 2007

Mortgage Tax Question...HELP  Reply with quote  

I purchased a property in February 2006 for which I live. I sold a property 5 years ago on a land contract, and the new "owners" make religious monthly payments. For the year ending 2006, I received about $8,000 in interest from the payments for the property I sold. Having no other loans, the total mortgage interest that I paid in on my current home purchased in February was also roughly $8,000. It seems to me that the interest paid SHOULD shelter the interest received. It does not. Since this year I do not have any other expenses to itemize, I will take the standard deduction ($10,300 for married jointly filing).

Could my mortgage interest paid in somehow be used to reduce my gross income as a business expense for financing the "sold" property. To me, it does not seem fair that I have to use almost the entire portion of my standard deduction just to "cover" the interest income from the financed property. If I owned a finance company, borrowed money secured by personal assets, and loaned it out at a higher rate than I borrowed to make a profit, wouldn't the interest paid on that note be a business expense fully deductible? What is the difference here? Not trying to circumvent any tax laws here, but I just would like to understand why. What can I do? Thanks in advance.
Post Fri Jan 26, 2007 7:11 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

I might be a little confused. It sounds like you're expecting one sort of deduction to offset a similar sort of income. Deductions are deductions. Income is income. If your mortgage interest paid is your only deduction and it's less than the standard deduction, you take the standard deduction. When you take the standard deduction, your mortgage interest won't offset income. Don't you have any other deductions? State income tax is a good one for bumping deductions over the threshold.

I don't think you can switch accounting from a personal transaction to a business transaction midstream.

Getting a copy of TurboTax or TaxCut will enable you to what-if your tax return scenarios.

~Tim~
Post Fri Jan 26, 2007 11:28 pm
 View user's profile Send private message
bim94
New Member


Cash: $ 1.55

Posts: 7
Joined: 19 Jan 2007

 Reply with quote  

quote:
Originally posted by coaster
I might be a little confused. It sounds like you're expecting one sort of deduction to offset a similar sort of income. Deductions are deductions. Income is income. If your mortgage interest paid is your only deduction and it's less than the standard deduction, you take the standard deduction. When you take the standard deduction, your mortgage interest won't offset income. Don't you have any other deductions? State income tax is a good one for bumping deductions over the threshold.

I don't think you can switch accounting from a personal transaction to a business transaction midstream.

Getting a copy of TurboTax or TaxCut will enable you to what-if your tax return scenarios.


I appreciate the feedback. I'll respond by speaking to those on this forum that can provide some insight other than by purchasing computer software. Rolling Eyes

I understand how the standard deduction works with regard to itemizing. However, I also realize that personal deductions whether they are itemized or standard are taken after the AGI is calculated. Business "losses" offset total income (line 17 of 1040). The reason I don't buy that "deductions are deductions" is that certain tax credits are based on your AGI. A person's taxable income is affected by either itemized or standard deductions, but a their AGI is not. What makes it so that the interest that I pay on a bank note cannot be characterized as a "business" expense? I also own rental property in a llc where the mortgage interest I pay offsets the rent I collect. Do I need to set up an S-corp or somthing to be able to characterize the interest this way? For instance, if I held a note in the name of an S-corp specifically set up to finance land contracts, wouldn't the interest I paid in on that note be an expense and the difference between that interest and the land contract interest income be reported on line 17? Again, thanks in advance for any responses.
Post Sat Jan 27, 2007 1:06 am
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

Deductions and credits are two different things. Deductions come off the AGI, and credits come off the tax. Business expenses are accounted for on Schedule C and are carried over to Form 1040, line 12. Line 17 is the amount from Schedule E, which is used for rental property income and supplemental income from certain types of tax entities the filer may have an interest in.

The interest on a note is a business expense if it's a note for conduct of a business and is reported on Schedule C. It's not deductible dollar for dollar against earned income, but offsets any business income reported on Schedule C. The net profit or loss from Schedule C carries over to Form 1040 as business income or loss.

The property you bought is a residence. It's not a business expense and cannot be accounted for on Schedule C. The interest is deductible only as an itemized deduction, reported on Schedule A.

If the property you sold was a rental property, then I presume the income from that could be accounted for on Schedule E, assuming you're still in the business of being a landlord and can file a Schedule E. If you're not, then it's ordinary income and reported on Schedule B as interest income Part I, line 1.)

You didn't mention in your original post that this was rental property, which always makes a big difference. BTW, I got the above info from my copy of TurboTax. In addition to tax software, tax publications from the IRS are quite helpful these days, as for the most part they're actually readable.

In any event, you should always get your tax advice from a professional. Dont' use anything you read on a message board as the basis for preparing your income taxes. Free advice, when it comes to taxes, is worth every penny you paid for it.

~Tim~
Post Sat Jan 27, 2007 1:36 am
 View user's profile Send private message
bim94
New Member


Cash: $ 1.55

Posts: 7
Joined: 19 Jan 2007

 Reply with quote  

Thanks to you, coaster (with the help of TurboTax), again.

I think everything you are presenting is reinforcing the response I am looking to get. I did not mention in my first post that the property I sold on contract 5 years ago is a rental property because it was not, although I do not necessarily see how it would affect the situation here. I used the rental property I do own (and use schedule E to come up with gains and losses to submit on my personal 1040) to illustrate a point. The point being that in a business, certain loan interest is considered an expense.
In the interest providing clarification, again I ask, what if I set up a business for which I secured a different note and it involved paying interest. As you say,

"The interest on a note is a business expense if it's a note for conduct of a business and is reported on Schedule C. It's not deductible dollar for dollar against earned income, but offsets any business income reported on Schedule C."

The business income in this case would be the interest income from the land contract.

The whole point here is this...I owned a house outright and right or wrong I sold it on contract 5 years ago. Now, I own a personal residence with a mortgage and mortgage interest. Even if I did itemize, it would all go towards sheltering the $8,000 in interest income from the land contract. Would it not be better to secure say a "business" loan to finance that land contract, offset the interest I pay against the interest I receive (on schedule C), use the proceeds from the business loan to pay off my existing home mortgage, and keep using the standard deduction, all while lowering my AGI?

...as my wife says when I go into a stubborn ranting, "the more you try to clarify, the more confusing you get"

[/quote]
Post Sat Jan 27, 2007 2:35 am
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

Well, it has to be a legitimate business with the intent of produding income. There's a criteria the IRS uses; I forget exactly -- I think you have to make a profit three out of five years (or something like that). Can you set up a business whose only income is the interest from one loan? Good question. There's a line on Schedule C for "other income" which can include interest income. But if you have a net profit, you'll be paying what's euphamistically called "Self Employment Tax" which is the full 15% of the Social Security and Medicare taxes which are otherwise split 50/50 between and employer and an employee in the case of W-2 income.

But you can't use 100% of the mortgage interest you pay on your residence as a business expense itemized on Schedule C, so you're not achieving your goal of a dollar for dollar offset. Claiming the full use of your whole residence as a business expense is a sure ticket for an audit. Laughing Home office expenses are a real sticky item, subject to close IRS scrutiny, due to many abuses. So even if you have a home office, and take a percentage of the mortgage interest, if it's just those two items, you're ending up with a net profit and paying the income tax AND the self-employment tax.

I think your wife knows the tax code. The more you try to make logical sense out of it, the more confusing it gets. This comes of years of using the tax code to implement social policies, and then repair their repurcussions. So it's meddling, tinkering, reform, overhaul, more tinkering, until even the IRS can't figure it out. Confused

~Tim~
Post Sat Jan 27, 2007 3:44 am
 View user's profile Send private message
efflandt
Senior Member


Cash: $ 80.45

Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
 Reply with quote  

Since you bought your home in 2006, if 2006 property taxes are due in 2007 you would not have that tax deduction yet. But you will in future years (from date of closing to end of 2006 in 2007, and full tax deduction for 2007 tax in 2008).

Although, if you had known amount of property tax due in 2007, you could have paid that before Dec 31, 2006 (unless escrowed). I did that for land I own in WI (tax bill Dec 2006, due Jan/July 2007), but cannot do that for my home in IL (2006 tax bill not mailed until May 2007).

State income tax (or state sales tax) is also deductable.
Post Sat Jan 27, 2007 8:12 pm
 View user's profile Send private message
bim94
New Member


Cash: $ 1.55

Posts: 7
Joined: 19 Jan 2007

 Reply with quote  

Thanks for the comments. My itemized deductions would be my state income tax (Iowa)...about $2000, mortgage interest...about $8000, and real estate taxes (next year)...about $2000. With maybe a $1000 in miscellaneous dedections the total would be $13,000. Missing out on the difference between the itemized and standard ($13,000 - $10,300) is not as concerning as having to claim the $8000 in mortgage interest "income" on page 1 of 1040.

Looking back, I wishI had purchased my personal residence in the name of my LLC that holds the other rental property. Then, maybe I could have rented the property to myself (at a very reasonable cost) and the interest paid on the note would be lumped in with the other rental property expenses.
Post Sun Jan 28, 2007 5:53 pm
 View user's profile Send private message

Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016