CMG HOA Handling Tax Deductibility

Home Ownership AcceleratorHome Ownership Accelerator

02-04-10

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CMG Home Ownership AcceleratorCMG Home Ownership Accelerator®®Sales TechniquesSales Techniques

HOA Tax DeductibilityHOA Tax Deductibility

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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


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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.


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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)


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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.


Payment TimelinePayment Timeline

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SEPTEMBER OCTOBER

Fri Sat Sun28 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 LIBORWall Street Journalon last business day of month


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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


Bedtime Reading! IRS Pub 936.Bedtime Reading! IRS Pub 936.

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So, What does Pub 936 Say About The So, What does Pub 936 Say About The HOA?HOA?

Nothing in particular.


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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?


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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


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”!!!

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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

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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)


Redraw: $50,000 (car 2)



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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!


Tax TimeTax Time

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Simple tax deductibility example:

Original Purchase Price (1/1/07): $700,000Original HOA Line Amount (1/1/07): $550,000Original Acquisition Debt (1/1/07): $400,000Home Equity Draw (buy yacht, on 1/1/07): $140,000Starting balance on 1/1/07: $540,000Regular principal payments of $20,000/mo

Principal Acquisition H.E. Interest 1098 Deductible Deductible 1098Balance 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 $0Apr $480,000 $400,000 $80,000 6.0% $28,800 $480,000 $28,800 $0May $460,000 $400,000 $60,000 5.9% $27,140 $460,000 $27,140 $0Jun $440,000 $400,000 $40,000 5.7% $25,080 $440,000 $25,080 $0Jul $420,000 $400,000 $20,000 5.5% $23,100 $420,000 $23,100 $0Aug $400,000 $400,000 $0 5.5% $22,000 $400,000 $22,000 $0Sep $380,000 $380,000 $0 5.5% $20,900 $380,000 $20,900 $0Oct $360,000 $360,000 $0 5.8% $20,880 $360,000 $20,880 $0Nov $340,000 $340,000 $0 5.9% $20,060 $340,000 $20,060 $0Dec $320,000 $320,000 $0 6.0% $19,200 $320,000 $19,200 $0

$297,020 $293,660 ($3,360)


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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.


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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.

Economy & Finance

CMG HOA Handling Tax Deductibility