Welcome back! Ask questions, get answers, and join our large community of tax professionals.
cancel
Showing results for 
Search instead for 
Did you mean: 

deductability of heloc interest

bandb
Level 3

Taxpayer's parents lent $100,000 in order that taxpayer could buy a home. One yea later, taxpayer's home has appreciated and he has taken out a HELOC to repay the loan. HELOC interest is deductible only to  buy, build. or improve your home. Can the taxpayer deduct the HELOC interest, since technically, it falls under the allowability rules,

0 Cheers
15 Comments 15
TaxGuyBill
Level 15

Probably not.

The rule is that it must be used to Buy, Build or Improve the home *AND* be secured by such residence.

Refinancing qualifies *IF* the original debt meets the qualifications.  So unless the original debt was "secured by such residence", the refinanced amount would not qualify.

bandb
Level 3

Hi: Technically, I agree. But practically, the parents lent the cash to the son to buy a home. I think taxpayer has a 50/50 chance of having the HELOC  interest expense allowed.

0 Cheers
IRonMaN
Level 15

I believe Al Capone thought his odds of committing tax fraud and getting away with tax it was better than 50/50.  Tax prep doesn't involve playing the odds, but instead is about understanding the rules and then applying them correctly.


Slava Ukraini!
bandb
Level 3

Agreed......but in the course of " understanding", there can be legitimate interpreations of the code. IRS wanted to make interest expese for a home to be deductible. This is , in substance, what happened. 

0 Cheers
BobKamman
Level 15

I think the taxpayer has a 99% chance of not being audited.  99.44%, depending on the results of November 8 election.  Most of the situations I have seen, when parents help the kids with down payments, they have to sign something that it's a "gift," not a loan.  I wonder what this mortgage company required.  

bandb
Level 3

Good Point. Thanks!

0 Cheers
abctax55
Level 15

*AND* be secured by such residence.

What about this part of the requirement?   

Was the parent's "loan" recorded?  I'd bet not, AND I'd bet (as Bob points out) that  the parents did have to stipulate it was a 'gift' in order to qualify for the mortgage. 

"*******Tax software is no substitute for a professional tax preparer*******
( Generic Comment )"
bandb
Level 3

This gets more interesting. Apparently , parents did have to sign a gift statement with the lender, did not file a gift tax return,  and when the son repays to the parents, he will have to file a gift tax return.. The issue of deductability of his HELOC interest is dead, and the issue of failure of filing a gift tax return needs to be dealt with.

BobKamman
Level 15

I don't see the need for gift tax returns.  Substance over form.  It was never intended as a gift in either direction.  Now if the value of the house has dropped by $100K and he decides to walk away from it, they may need a defense lawyer who handles fraud cases.  

bandb
Level 3

1. Should the parents and son simply ignore gift tax filings ? 2. Does the lender care about the "misrepresented statement" that was signed ?

0 Cheers
BobKamman
Level 15

Since there were no gifts, there's nothing to ignore about gift tax filings.

Lenders don't usually care as long as the payments are made on time.  However, the New York attorney general has brought a civil case involving fraud even though the lenders haven't lost anything (yet).  

abctax55
Level 15

Brings to mind:

“Oh, what a tangled web we weave...when first we practice to deceive.”

Technically, the lender could call the loan 'cuz they were lied to.

"*******Tax software is no substitute for a professional tax preparer*******
( Generic Comment )"
bandb
Level 3

The plot thickens. The parents insist they intended a gift,so the certification is truthful ,but a year later the son insists on repayment of the cash. In my opinion: 1. Parents were truthful with the lender 2. Deductability of HELOC interest is a dead issue. 3. Gift tax reporting is still an open issue.

 

0 Cheers
BobKamman
Level 15

Are the parents also your clients?  Are they anywhere close to the $23+ million net worth where a gift tax return might lead to actually paying some tax eventually?  Are they telling the truth, or are they trying to protect the lie to the mortgage company by repeating it to you?  Sounds like it's after October15 and you're beating the bushes to collect a fee for a 709 return.  Although, I'm sure that's not the case.  

IRonMaN
Level 15

I'm just waiting for the post that tells us the $100,000 came from unreported income in the father's barbershop business😉  Time for this post to die a nice natural death.


Slava Ukraini!