Here’s some more bad news for John Q. Public:
We all know that the fun of the past few years Housing binge / ATM withdrawal / GDP Party is long since over. But it turns out that the hangover isn’t nearly done.
Why is that? Well, one of the advantages of Home Equity financing is that if you use the proceeds for capital improvements to the home — *new floors, walls or lighting, installing central A/C, removing trees, refurbishing bathrooms, new lawns or gardens — then it has the same tax deductiblity as if it were a primary mortgage.
What abut if you use the proceeds for other, non-capital improvement purposes?
From Realty blog Patrick.Net:
"Word from the IRS is that they are auditing people based on refiances on their
house. If you refied and pulled money out of the house and use for other
purposes than home improvement you can not claim that as Mortgage Deduction,
needs to be claimed as Interest expense. Guess what, they want proof of home
improvements…"
Uh-Oh !
Why do I smell some big trouble coming down the road for some people?
>
Source:
Refi Interest Trap?
March 28th, 2008
http://patrick.net/wp/?p=594
_______________________
* What we did to our home
That’s going to hurt. A lot of people have been using that loophole for a long time to buy vehicles and whatever else.
Irony is, the government giveth in the form of lender mitigation, yet the government taketh away in the form of tax “gotchas”. The IRS will have a bountiful harvest on this, but since uncle owns the note as pawn, it will end up making this mess much messier.
Why do I smell some big trouble coming down the road for some people?
__
You’re just now smellin’ it? The first time I smelled it, I checked my shoes (but it wasn’t me – whew!). It’s coming from all of the new houses.
America’s got a bad case of stinkhouse.
Maybe they should head out to the Cayman islands and check out that building that holds 12000 corporations. Its either the biggest building on the planet or there are a whole bunch of companies avoiding taxes.
This is a problem for many people, but up to $100,000 of home equity debt can be used for anything and you still get the interest deduction as long as you don’t have debt in excess of the fair market value of your house. Interest on home equity Debt in excess of the homes FMV or over $100,000 is not deductible unless used for improvements. See IRS publication 936 for more info. If your mortgage balance is greater than the FMV of your house and you used the home equity to pay off credit cards you are in trouble.
This kind of ties in with the earlier post about GDP – to get a true sense of the economy, watch how tightly governments begin squeezing for extra taxes.
Ever notice you don’t read about Medicare corruption probes when the economy (and thus tas receipts) is booming?
I may be wrong, but my understanding is that usually $100,000 of home equity debt that was not used for improvements is still deductible.
Barry,
You do not know how ridiculously overpriced the housing market has gotten in certain areas until you go there. I just came back from Florida. I have thought about moving and retiring in Florida for years. I am currently living in Maryland, which is now classified as the richest state in the Nation. When I visited Florida 8 years ago, you could sell your townhouse in Maryland, take the money and buy a 3BR 2BA nice home with a pool, located in a great area and still have change left over. WOW! Have things changed. While prices in Maryland doubled during the boom, prices in Florida went through the roof. I was looking in the Jacksonville area and could not believe what they are asking for homes down there. I looked in Saint Johns County, which is 30 minutes or more from Jacksonville. This area had undeveloped land everywhere. I figured for sure I could buy land reasonable, but I was wrong. I went to one new development and they were asking $800K for a home that was on about 1/8 of an acre. And the Real Estate Agent is telling me how bad the market is and what a great deal this was. I thought to myself there are thousand of acres of undeveloped land around here and they are asking $800K for a home on 1/8 of an acre. This home should be on 6 acres and cost less than ½ that price. I will not even start on the homes located on the Beach or Homes on the Saint John’s River at 1Millon Plus.
I can not believe homes in Florida are now more expensive than Home in Maryland, which has tremendous Defense, Industries and high paying jobs. My conclusion, Florida Real Estate will be dead for year until the prices become reasonable again and retires from the North will start to look in Texas and other Southern areas that are still reasonable
First I’d like to address the topic of the IRS. As I’ve posted here before, if the IRS would examine capital gain exclusions of so called homesteaded properties, it would uncover a potential goldmine; there are numerous homes that were flipped over the course of the past 5 years that were solely investment vehicles, yet were claimed to be permanent residences (thus the first $500k of capital appreciation is tax free) the revenue this could generate is huge. Simply put, how can we continue to put all the blame on the institutions or the Fed and not place the majority of the blame on the idiot/speculator/would-be-renter who put themselves in this position to begin with? These people are in the predicament they’re in because they can no longer flip their properties for a quick $100k.
As for the post regarding Florida real estate: I am a lifelong resident of the sunshine state, in my early 30s, and a moderately successful trader. I have been looking for a modest ($300-600K) home in the Tampa and Sarasota markets since January of 2006, with a keen idea of what that dollar amount SHOULD buy. I have not purchased a home yet (this would be my 1st purchase) because I will not submit to the excessive prices. There has been too much speculation and fraud here. Seriously, I can document over 100 homes that my wife and I have looked at where diligence reveals some sort of fraud.
Next, the Realtors act as if you are getting the deal of the century in today’s market, as if the market’s going to take off again next week. The brokers/agents/Realtors are hurting the recovery. They need to realize the shenanigans that went on here the past 5 years aren’t going to happen again. As for pricing, the inevitable correction will take place, but over another 5 years.
AJF writes:
> Simply put, how can we continue to put all
> the blame on the institutions or the Fed and
> not place the majority of the blame on the
> idiot/speculator/would-be-renter who put
> themselves in this position to begin with?
After a year of trying to calm down about it, I still have a visceral reaction against this notion. We live, now renting, in South Florida, and saw dozens on dozens people wheel and deal, some insanely greedy, some just trying to make it through life. None of them borrowed enough to destroy the economy. None of them borrowed anything that a bank wasn’t willing to lend. Blaming the individual speculators is sort of like blaming a drunk teenager for wrecking a car he was test-driving; sure he’s at fault, but shouldn’t the dealership have kept the keys when it saw the kid was drunk? By the same token, the banks/regulators ought to analyze risk, and they didn’t.
Regarding the above post: Comparing a grown adult who lies on a mortgage app or lies to the county regarding a homestead exemption or lies to the IRS regarding cap gains or home eq loan dispersements to a drunken teenager is a poor analogy, one that denotes sympathy for the poor, drunken teen. This mess was created by grown adults and will ultimately be resolved with time. The time of this resolution will be inversely proportional to government regulation. And no, it wasn’t the actions of any one speculator that is causing the problems now, but the collective result of numerous speculators and the resulting mentality that “this is the bottom” or “now’s the time to buy” . . . banks can’t analyze the risk when the mortgage app is covered in lies (from either a mortgage broker or the applicant) or while the NAR spews its pabulum. Seriously, what would have happened if Bernanke or Paulson publicly stated anything regarding this catastrophe back in early 2006? Anything that came after Feb 2007 is no longer fair game . . . the only pundit that came close to gauging this ordeal accurately is Nouriel Roubini, and he was generally treated with contempt and disinterest by the MSM (well, at least CNBC and Bloomberg).
I was at a dinner party Sat. night and everyone lamented on how far we had fallen (as a country) and how fast. We all knew it but those of us that played it smart will win in the end but we will also feel the pain. This is not new news, but a slow realization is taqking place. Most Americans are dumb!
Many of the borrowers were encouraged to lie. 20 years ago, trying to pull “lies” like that to a lender would get you laughed out of the room, if not prosecuted.
Barry, I can’t believe you haven’t commented on the Paulson plan. Probably tomorrow. …
Some of this debate is just over assigning relative culpability.
In the borrower-lender case:
– The borrower sees 1 (or a handful) of deals, while the bank sees 1000’s.
– The borrower, many less-educated than you blog readers, has not much more than his/her experience to learn from. The bank employs economists who study history.
– Most borrowers presume banks know their business and wouldn’t “lend irresponsibly”.
– The banks weakened their own lending standards. Is that not encouraging the stupid behavior they already saw a thousand times over? Some banks appeared to even be suicidal.
For my own experience, a couple of loan officers told me I would qualify for a much higher loan than I was asking for. I disappointed my wife by telling her the loan officers were nuts and that we would not buy a house for that price. (We never bought, because the market for a house was already beyond my own sense of what we could afford.) Of *all* people, the lenders should have known better. That was their business. Those were the “experts”. Don’t we normally assign more blame to “experts who are wrong” than to “non-experts who are wrong”? I do…
I agree that mortgage brokers are more wrong. I assume that they run a credit report right?
Also – it says on the loan application that you sign agreeing that all statements are true and that if they are knowingly false it breaks a federal law. I forget the statue # – but I haven’t heard anyone get arrested for lying on a loan app.
Why have the law if it is not enforced?
Totally agree, Kurt. Actually, I think we can spend our way out of recession by prosecuting and jailing everyone in the food chain who committed fraud.
We still prosecute penny-ante crooks for passing bad checks and such, right? WhereTF is white collar law enforcement?
Mortgage interest shouldn’t be deductible in the first place…it’s just welfare for the middle class
And if John Q. Public hits the wall and thinks that there’s light at the end of the tunnel (by defaulting, etc.), it’s really a train coming their way, called COD income … Cancellation of Debt, which is regarded as taxable income by the IRS.
> After a year of trying to calm down about it, I still have a visceral reaction
> against this notion. We live, now renting, in South Florida, and saw dozens
> on dozens people wheel and deal, some insanely greedy, some just trying to make
> it through life. None of them borrowed enough to destroy the economy. None of them
> borrowed anything that a bank wasn’t willing to lend. Blaming the individual
> speculators is sort of like blaming a drunk teenager for wrecking a car he was
> test-driving; sure he’s at fault, but shouldn’t the dealership have kept the keys
> when it saw the kid was drunk? By the same token, the banks/regulators ought to
> analyze risk, and they didn’t.
I’m sorry, but anyone who is over the age of 25 ought to have enough life experience to be able to make decisions for themselves.
Sure the banks share a lot of the blame for lending when they shouldn’t and pushing questionable products, but this mess wouldn’t have got as bad as it had if a few more people had actually asked themselves the question ‘can I afford this house?’.
After living in CA/TX for three years (until 2006) I just couldn’t believe the amount my friends would blow on houses/cars/boats relative to their salaries. Now, a couple of years on their purchases don’t seem like the great idea they once thought they were.
Here in the UK we are about 1-year behind the US (as always) in the housing crash, but I have close to zero sympathy for those who are going to get bitten by it. In the short term every individual who contributed to pushing the housing market beyond a sustainable level penalized those who were more financially prudent and stayed renting while house prices soared. In the long term, if we are to avoid a moral hazard those speculators must be allowed to feel some financial hard ship if only to prevent all of us in the western world getting into this situation again.
BTW, the drunken teenager in your analogy would have been booked for DWI by the police so his actions still had consequences for himself as well as the car dealership.
Mortgage debt for non real estate purposes has usually been taxable. Nothing more than selective enforcement. But who knew?
It is amusing how we got to this point. Lying? Maybe it got started when companies started lying after 25 or 30 years and saying oops, no pension, sorry no health care. Or maybe it was a lying president and even bigger lying VP, lying on the intelligence reports.
I think this country is definitely reaping what it sowed. The lying society is coming home to roost.
Perhaps lying will no longer be in vogue.
OUCH! It’s gonna leave a mark!