[gonzy]

I was talking with some of the other aarp tax preparers today and they mentioned that one of their clients had come up with a good idea re: tax deductability of their bond payment. As it stands the bonds are not tax deductable on schedule A as they are a non-ad valorem i.e. not based on value. However if one were to take out a home equity loan and pay off their higher interest bond with a lower interest (and hopefully minimal expence home equity loan) that would allow them to deduct the mortgage interest and possibly save some money on the lower interest home equity loan. Obviously this would only apply to people who can use schedule A or those who are paying high interest on their bond. I live in Lake county and don't have a bond so am not familiar with what the interest rates are. Can someone comment on bond rates?

[Archer_ID]

Great idea on the tax deductible angle. We've just purchased a new home in TV and I think it makes sense to do what you suggested. Can anyone think of reasons not to substitute the bond liability with a home equity loan?

[clekr]

Don't work. In order for the interest on the second to be dductilbe you have to put the money into the residence.

[boobear51751]

Home equity would work. You do not have to put the money borrowed back in to the home. All that means is you are taking out a second mortgage on your home. We took out a home equity 22k used some to redo the kitchen and had money left over 6k and desided to take a second honeymoon (25th wedding anniversary) with it. We did pay it back 6 months into the following year. But still, sounds like a win win idea to me for those that have a bond. Go for it lower those interest rates when you can.

[Russ_Boston]

Clekr - You're too old to still smoke the wacky weed :joke:! Where did you hear that? I hope that you haven't missed out on deductions in the past with that lack of knowledge.

[gonzy]

Home equity loans are deductable provided they do not exceed $100,000 and do not exceed the fair market value of your home. See pub. 17 page 147 for a little light reading.

[clekr]

Russ Boston -

Sorry to disappoint, but I'm only 56. And, I haven't touched that stuff since college.

Admittedly I do not know all about this subject. While I'm in my 35th year at IRS I have not dealt with individual income taxes other than my own for over 30 years. (I only deal with corp.s over $100M) Actually, knowing I was shooting from the hip I pulled the publication at work today and I'll get you the story later tonight. I having glanced at it at lunch I think I came pretty close though.

[clekr]

Gonzy pretty much has it. Though as everything with our wonderful system it is not always that simple.

You may deduct the interest on the home equity debt if the amount of the loan is the smaller of:

1. $100,000, or

2. the homes FMV (at the time the acquisition debt was incurred) less amount of the acquisition debt.


So if you bought the house for $100,000 and immediately borrowed $75,000 against, you could not deduct the interest on the new home equity loan if the amount of the loan is greater than $25,000.

Of course, as with all the stuff passed by those with infinite wisdom up on The Hill, there are a myriad of nuances. I have neither the space or the patience to go there.

[Indy-Guy]

Yes I agree a home equity loan would be a deduction. However let me give my thoughts in paying off the bond.

Refer to a previous post.



https://www.talkofthevillages.com/sm...ic,1702.0.html

[Boomer]

Originally Posted by Indy Guy

Yes I agree a home equity loan would be a deduction. However let me give my thoughts in paying off the bond.

Refer to a previous post.



https://www.talkofthevillages.com/sm...ic,1702.0.html

Indy Guy,

What you said in the link --

I completely agree.

Before our initial visit I had it in my head that the bond should be paid off. After seeing how the market there works, I changed my mind.

If an owner plans to stay in the home forever, paying off the bond may provide a good return on the investment. But for an owner who ends up selling fairly quickly, I just don't see that the ROI is there.

To me it became somewhat analogous to selling a house with a swimming pool. The number of buyers who really want it enough to pay extra for it is very limited. Then there are the buyers who see it as a nice thing that gets "thrown in" so to speak. Of course, unlike a pool, all buyers would be happy to have a paid bond. I just don't think that there are very many who would be willing to pay extra for a paid bond.

The market now is more competitive than it has been so a paid bond could be a selling point but will not necessarily provide the seller with a return on the investment if a competing home is priced lower. A paid bond may move a house more quickly but the seller may have to absorb what was expected to be a return.

I tend to be financially fairly conservative so I was actually pretty surprised that my conclusion was to just let the bond hang out there. But that is what I would do unless I planned on living in the home forever, at which point, I would have to revisit the idea. But I would probably still let it hang as long as I knew I could generate the income to cover it.

Anyone considering a home equity to pay the bond needs to run the numbers and really think hard about the wisdom of using their house as a piggy bank. I have always had a problem with the return on income tax argument. To me it is like saying, "Hey, I will give you a dollar if you give me a quarter." - or whatever. But everybody's situation is different. Run the numbers.

Another consideration in running the numbers is whether or not you would have to tap into tax-deferred money to pay debt.

Financial decisions, particularly in retirement, can turn into something like those big long story problems from school. -not much fun.

When we make financial decisions, our bottom line question is always, "What is the cost of sleep?"

[cabo35]

Thanks. Great thread. Articulate, thoughtful and useful insights. If you guys could only put your heads together and help lower my handicap with the same ease and clarity you address financial gymnastics...........