published August, 2008
The IRS has started auditing for the limitation on mortgage interest for people who have taken money to live on (or buy a boat) out of their house.
If you borrowed money to make improvements, you’re OK.
If you borrowed money and invested it in a business, you’re OK.
If you borrowed money and blew it on gummy bears, you may have non-deductible mortgage interest—interest you have to pay, but is non-deductible.
You can borrow up to the “adjusted purchase price” of your house and deduct it.
You can borrow an additional $100,000 and deduct it for regular tax too, but not for AMT! We call this a HELOC – home equity line of credit.
Additional amounts borrowed can be deducted if they can be “traced” to an investment activity—that is to say, if you can show how you used the money in your business, or you bought rental real estate with the funds.
Other amounts are considered “personal” interest, and that hasn’t been deductible since the 80’s (ah, the good old days when credit card interest was deductible!)
The IRS has realized they could “make some money” here and we’re expecting to see some audits which will include this issue.
So, what do you need to do? Keep track of your mortgages. Keep those mortgage interest statements. Collect the information on the original purchase of your home and provide it with the next round of tax returns. Start collecting the statements now – perhaps a “2008 Tax” file folder somewhere?