CMG HOA Handling Tax Deductibility
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CMG HOA Handling Tax Deductibility
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- 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. 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. 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. 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. 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. 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. 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. Home Ownership AcceleratorHome Ownership Accelerator Bedtime Reading! IRS Pub 936.Bedtime Reading! IRS Pub 936. 8
- 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.
Notas del editor
- Welcome to the CMG Home Ownership Accelerator broker certification course. Certification is a required part of selling the Accelerator loan, and this presentation is designed to provide you with a full overview of the product and how it works, and why it makes sense for today’s savvy homeowners.
- We get three basic questions regarding the Accelerator and taxes. Two are straightforward and you can handle them smoothly with a little practice. The third on this list is the one that should involve a tax advisor. In this presentation we will offer you some basic explanations that you can use to satisfy the client and move them back to discussing the benefits of the Accelerator. The key is to validate their questions as important, respond to it seriously, but move on quickly to avoid getting bogged down on this one issue.
- Repeat this as often as you have to to get the message across. Tax questions are best handled by the tax experts. That said, clients will ask you tax questions, and you need basic answers to assure them that their interest tax deduction is available to them.
- >The interest rate on your loan is based on the 1-month LIBOR index as > published by the Wall Street Journal on the last business day of each month. >That rate applies for the next statement period. >Your fully-indexed rate, the rate on which your interest is computed, is the sum of the 1-month LIBOR index (which floats) plus your margin (which never changes). >The rate can’t go higher than 6% over the fully-indexed rate in effect when your loan closed. > Similarly, it can’t go below 3.5%, which is called the minimum or floor rate. The formula for computing your interest is shown here - - > it’s figured by taking each day’s ending balance during the period and multiplying by the daily interest rate, which is your fully-indexed rate divided by 365 (subject to maximum and minimum rate limits).
- Let’s quickly review how interest is charged and paid. Interest is calculated on the daily balance, and the accumulated interest charges are billed to the customer at the end of the month. Interest is paid just like any other bill, by converting home equity to cash. If the client has available credit, the bill is paid automatically. Because the lender is receiving their money, the bill is considered paid-in-full on-time every month. At the end of the year, the lender issues a standard 1098 listing all the interest paid as mortgage interest payments. It is not reported as installment payments or unsecured line of credit payments.
- Here’s a bit more detail on how the payments work. Your statement cycles on the last business day of each month. >Typically this will fall between the 28th and the 31st of the month, >and your payment is due on or before the Payment Date, >which is 25 days later. If you have available equity, and you do not make a deposit before the Payment Date, your payment due (which will usually be just the interest you owe) will be advanced from your line >automatically on the Payment Due date. >If however, you make a deposit before that date, say for instance, a paycheck > arrives on the 15th as is typical for many people, the amount of any payment outstanding will be >deducted from the incoming deposit first, and any residual portion of the deposit >will pay down principal. After that,> if you make another deposit and you have no more payment due, >the entire deposit will of course reduce your principal balance. >The rate you pay is based on the 1-month LIBOR index published in the Wall Street Journal on the last business day of the month.
- A third concern that people have is losing their tax deduction when their loan pays off. > The good news is that you WILL lose it when your loan pays off. >We like to say that “interest is not in your best interest” because you have to pay $3 in interest to get about $1 back in deductions - - not a great deal. In fact, if getting a higher tax deduction was the objective, then you’d want to take out a loan with a higher interest rate, right? Of course this makes no sense. So get rid of your loan as soon as you can, with the CMG Home Ownership Accelerator. > And remember, the same tax rules apply to this loan as with other loans, and the interest you do pay while you have the loan, may be tax deductible – your clients should see their tax advisor.
- Will the IRS treat interest on this loan differently than a “traditional mortgage”? No.
- Will the IRS treat interest on this loan differently than a “traditional mortgage”? No.
- Will the IRS treat interest on this loan differently than a “traditional mortgage”? Let us think about what the IRS cares about. Their rules state that there are two kinds of home financing debt. One is acquisition debt, used to buy or improve property. So, significant renovations would be considered acquisition debt, even if you tapped your equity using a line of credit. On the other hand, if you do a traditional cash-out refinance and use the extra cash for cars or debt consolidation, the cash you extract may not all qualify to have the interest deducted. We will look at such an example in a minute. DO NOT GET INTO SUCH DETAIL WITH YOUR CLIENT. Explain the difference and move on.
- Here is the gray area that could concern people cashing equity in for non-acquisition expenses. If you increase your balance more than $100,000, as in the case above, you may not be able to deduct the interest on the last $50,000. If, however, the last $50,000 was for home improvement, it may still be deductible as acquisition debt. Again, the type of loan used to extract the cash is immaterial.
- This graph visually shows that if you originally had a $400K loan, and you paid it down to $200K, your new acquisition debt basis would be reestablished at $200K. Now you need to pull out $300K, let’s say. You have 3 ways to do it. Get a HELOC (or second), do a cashout refi to a new loan, or get a HOA. The same tax rules apply to all 3 moves - - you can only go up by $100K (which is a home equity draw in all cases, unless you use the money for improvements) and still have it be deductible. Your new tax deductibility would be $300K in all cases!
- Most accountants welcome this new idea. They understand cash flow better than most people. They can be conservative, however, so make sure they are in the loop well in advance of funding dates. You don’t need naysayers tearing down your good work with clients. Proactively convert the potential naysayers into supporters. That also positions you to add the accountant to your network. Make sure they have your materials, and suggest that you would be willing to educate them and theiir client base on the potential of this new loan. Not all will be ready to do that, but some will, and you won’t know until you ask!
- Tax questions are important, but they should not be the maker or breaker of the deal for your client. We are comfortable with the opinions we have received from the accounting community on this issue, and you should deal with it confidently and move on.