Technical topics regarding tax preparation.
3-Oct-2022 10:50pm
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I think I know the answer to this one, but I'm hoping someone smarter than me can correct me.
My client had a home mortgage loan of $400,000. His home is worth over $2 million. Therefore, he refinanced for $2,000,000 in towards the end of 2021 and paid almost $20,000 in pre-paid points. With the $1.4 million cash-out, he used a portion to purchase stocks and a rental property. However, these new investments wasn't purchased until early 2022.
I'm afraid to tell him most of the $20,000 prepaid points is not tax deductible as a 2nd home, rental, or investment interest deduction on his 2021 tax return because the second home and stocks were not purchased during 2022. Please tell me I'm wrong.
4-Oct-2022 7:51am
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1. You can't deduct the points all at once anyway; it has to be amortized.
2. Look at the interest tracing rules. For the borrowed funds that were deposited to a bank account and not used within 30 days, that is treated as investment interest expense. The interest (including amortization of the points) is (potentially) deductible now. Enter it on Form 4952 line 1.
6-Oct-2022 7:19pm
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And next year, only interest on the amount of the original principal will be deductible, unless he makes an election to not treat this loan as secured by his primary residence, in which case his rental etc. interest will become deductible (if paid directly & traced correctly), but then interest on his original principal will not be deductible. It's an all-or-nothing election.
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