DEAR BOB: We own rental property that is now paid off and fully depreciated, but giving us little tax write-off. We would like to take out about $150,000 equity to refinance a new mortgage. Will the IRS let us again write off the interest on such a new loan? Are there any limitations how the $150,000 can be spent, such as remodeling our current residence? – Mr. R.V.
DEAR MR. R.V.: There are no restrictions on refinancing investment and business property, or on the use of the funds obtained from the refinancing. Yes, the mortgage interest will be tax deductible.
Purchase Bob Bruss reports online.
However, you could be creating a future tax problem. It is called “mortgage over basis.” When you eventually sell that rental property, if you do, your mortgage balance will probably exceed its depreciated basis.
At that time, your capital gain will be the difference between the depreciated basis and your adjusted (net) sales price. But you won’t receive that full amount in cash because you will already have received part of it in the form of cash from the mortgage refinance. For full details, please consult your tax adviser.
PROS AND CONS OF INTEREST-ONLY MORTGAGES
DEAR BOB: My wife and I want to buy our first home. But it will be a financial stretch. We met a mortgage broker who offers an “interest-only” mortgage. The monthly payment is “rock bottom” because it is an adjustable-rate mortgage (ARM), which changes the interest rate every six months. What is your advice? – Clemente W.
DEAR CLEMENTE: I like interest only mortgages because the monthly payments are usually much lower than for fixed rate mortgages. But the disadvantage is you won’t be building any home equity by paying down the mortgage balance.
Also, the big risk is your ARM interest rate will probably increase in the next few years. However, if this is your best opportunity to buy your own home, I think the risk is worth the probable reward.
HOUSE RECEIVED AS A GIFT HAS A LOW BASIS
DEAR BOB: My mother was willed her house about nine years ago. She gifted it to me over two years ago. It has increased in market value about $30,000 since mother received it nine years ago. I have lived in the house for the nine years and owned it over two years. Does this qualify me for that $250,000 principal residence sale tax exemption? – Clark S.
DEAR CLARK: Yes. You appear to qualify since you have owned and occupied your principal residence at least two of the five years before its sale.
However, because you received the home as a gift, please be aware your adjusted cost basis is the same as your donor mother’s basis when she received title to the house nine years ago, plus the cost of any capital improvements she added.
Your basis is not the market value on the date you received the title by gift from your mother. For full details, please consult your tax adviser.
The new Robert Bruss special report, “Everything Homeowners Need to Know About the New $250,000 and $500,000 Home Sale Tax Exemption Rules,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.bobbruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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