Planning Opportunities In Home Ownership & Mortgage Interest Deductions

An AZRAN FINANCIAL APC White Paper

Joshua V. Azran, CPA/ABV/CFF, CMA, CGMA, CFE

Partner/Owner

February 2012

AZRAN FINANCIAL APC

CERTIFIED PUBLIC ACCOUNTANTS & ADVISORS 1888 Century Park East, Suite 1550 Los Angeles, California 90067 Tel: (310) 691-5040 Fax: (800) 272-5016 www.AzranFinancial.com info@azranfinancial.com

Contents Introduction Home Purchasers Home Construction/Remodeling Home Loans for Education Retirement Considerations For Those Who Serve 1 2 3 4 5 6

Introduction Home Purchasers Primary reasons most people obtain a mortgage Home Construction / Remodeling Considerations and tax implications for home improvements Refinancing for Education An alternative to high student loans rates Refinancing for Retirement A few considerations to maximize your equity you have available at your disposal in your golden years For Those Who Serve Youve secured our countrys freedom by serving with your life, let us now serve you Important Publications & A Note from Azran Financial

Important Publications A Note from Azran Financial

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For many, the purchase of a home signifies a monumental accomplishment, stability within a household and security in the future. During your life, your home will likely be both your largest debt and your largest asset. This leap in responsibility begins with a mortgage. Understanding the tax and budgeting considerations when purchasing property is best aided by a team of trusted advisors including your CPA, financial planner, and mortgage broker. While lenders may often speak with you about the numbers from a financing perspective, there may be many advantages that can be missed from the perspective of taxation. Lenders can assist you with understanding the banks assessment of the financial viability of taking on a mortgage, but your CPA will be in the best position to provide you with a holistic understanding of the financial implications. It is important to understand the various opportunities during the planning process in order to maximize your equity and to minimize your liabilities, creating a better future for yourself and your family. The deduction for home mortgage interest is one of the most potent tax breaks available today. Take note that there is more involved than just a tax break that cuts the cost of home ownership. Given the potential for tax savings, it is useful for you and your CPA to review the rules. As you will see, the tax code is complex, full of pitfalls as well as opportunities. The opportunity for savings will depend on your reasons for obtaining a home mortgage or home equity loan and how it will be applied. In the following pages, you will see a few scenarios that may apply to you.

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FOR HOME PURCHASERS

For the vast majority of families, owning a home is the first big step of building a strong foundation. The vast majority of Americans will usually be able to fully deduct the interest paid on a loan if the proceeds are used to buy or build a residence (a main home and one vacation home). This type of financing is called acquisition debt. For all interest to be deductible, acquisition debt cannot exceed an aggregate of $1.1 million, and must be secured by your home. In most situations, you will also be able to fully deduct any points you pay to the lender in the year you obtain the mortgage loan to buy your main residence. Maximizing the potential for tax savings is often a challenge. For example, suppose you are selling a home in which you have substantial equity and are seeking to buy another property: Is it better to use all of the cash you net on the sale as a down payment and get a small mortgage (and small deductions) on the new home? Or is it better to invest the cash elsewhere, possibly in a tax-favored vehicle, and get a larger mortgage that yields fully deductible interest?

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FOR HOME REMODELING

Over time, many home owners remodel their home for maintenance, upgrades to appeal to modern technology, or just aesthetic appeal which gives a more personalized feel. There may be tax credits available which can be used to offset the costs of the projects. If you refinance your existing home loan for the purpose of expanding or remodeling your home, all of the interest you pay on the new loan will usually be deductible as acquisition debt. Here, the decision-making process often involves financial as well as tax considerations. Are you better off refinancing your existing loan, securing a second mortgage, or obtaining a home equity line of credit? How many points will you pay on the new loan? Will you pay for the points at the loan closing or will you finance this charge over the loan term? If you remodel your main home, when you will be able to deduct the points charged depends on the ratio of the remodeling cost to the total amount of the new mortgage, and on the method of payment for the points. Have you considered the tax implications on what you need to do in order to maximize your dollars use?

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HOME LOANS FOR EDUCATION

Discussions that involve higher education have become a growing concern and can be an emotionally charged subject. While we recognize that there is value and a demand to pursue higher education, the financing aspects can be very convoluted and turbulent. Student loans can be very expensive and is considered one of the highest points of financial stress for many families. As student loan interest rates increase however, many have noticed that mortgage rates have remained low and stand as an alternative source of tax deductible funds for financing you or your childs education and future. Please bear in mind that the tax implications are different as well as the obligations. Have you considered the best way to handle the funds required to finance this life enabling investment from a financial and tax stand point? Have you considered the complete benefits between securing financing opportunities from your home instead of a traditional student loan? Have you considered the financial risks and benefits surrounding all of your financing options? Have you considered the tax implications involved with each option that can vary between thousands to tens of thousands of dollars?

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RETIREMENT CONSIDERATIONS
Youve worked hard all your life and have made it to retirement. As we hope to relish in our golden years funded by years of hard work, we have discovered that many individuals who have come to retirement have to battle many complex financial issues. One area that is commonly explored is the need for supplemental income. An additional source of income that could be taken advantage of in your golden years may come from a reverse mortgage on a home. There are many tax benefits from this option. For example, income from a reverse mortgage is technically a loan, as a result your income does not actually increase from this supplemental distribution and the interest received from this type of mortgage may be deductible from other streams of income that you may currently have in place. Are you familiar with the limitations needed in order to stay compliant with these tax rules? Have you considered the age limitations that weigh in for this type of financing option? Do you understand how this will affect your tax liability? Have you examined how this will affect your current investment strategies and goals? Have you

discussed with professionals as to how this will affect the legacy you leave to your loved ones?

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SPECIAL BENEFITS FOR THOSE WHO SERVE

The cost of freedom runs high.

No other

group deserves the recognition of securing our freedom and lives than the individuals who serve in uniform. To help recognize those who serve our country, our tax code provides a taxfree military housing allowance to assist with the living expenses for the courageous people who keep us safe. A tax-free military housing allowance may not affect the home mortgage interest deduction. Certain individuals may be permitted a double tax benefit. The military housing allowance can often be received tax free and can be used to pay deductible interest or taxes. If you currently serve our country, have you considered the possibilities that you may be missing by being able to leverage your capital to improve on your financial situation? You have helped us rest easy in our homes, let us help you rest easy in yours.

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IMPORTANT PUBLICATIONS
We understand that the services and financial solutions that we provide are credible and actionable. At the time of publication, the information you just reviewed was obtained from the sources listed below. For more information on all topics herein, please look through the below listed publications. If you are not familiar with how to apply these publications and codes to your own situation, please seek the assistance of a qualified advisor: IRS Publication 936: Home Mortgage Interest Deduction IRS Publication 530: Tax information for Home Owners IRS Publication 523: Selling your home IRS Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers IRS Publication 3: Armed Forces Tax Guide Internal Revenue Code: Sec 163. Interest Internal Revenue Code: Sec. 107. Rental value of parsonages Internal Revenue Code: Sec. 265. Expenses and interest relating to tax-exempt income Rev. Rul. 80-248, 1980-2 CB 164, (Jan. 1, 1980) on Reverse mortgage loans
*Please note that this is only a selection of the more relevant issues regarding this topic of home mortgages. These pieces were selected because they were the most important sources of literature that were used to bring you this information. Please understand that it will not provide you complete information required to come to an informed decision on your financial situation and are subject to change at any time due to legislative action. This publication contains general information, and is not intended to be comprehensive, or to provide specific accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional advisor. Whilst every effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed, and neither Azran Financial APC nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication. Any such reliance is solely at the users risk.

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A NOTE FROM AZRAN FINANCIAL APC

We hope you have found the information presented here helpful. Azran Financial is a boutique Certified Public Accounting (CPA) firm based in Los Angeles. As a firm, we believe in the value of relationships. We view every client relationship like a partnership, and truly believe that our success is a result of your success. We are committed to providing close, personal attention to our clients. We take pride in giving you the assurance that the personal assistance you receive comes from years of advanced training, technical experience and financial acumen. We provide a variety of services including: Income Tax Preparation Compliance, Advisory and Planning for all types of businesses, and individuals IRS and State Audit Representation Payroll Reporting QuickBooks Setup, Support and Training by Certified ProAdvisors Business Startup Services Monthly Bookkeeping Financial Statements - ensure your financial records are timely and accurate Audit & Attest Financial Reporting and Analysis Outside Controller Services Transactional Advisory Forensic Accounting Business Valuation Fraud Examination Financial Modeling Management Consulting Services.

We bring the expertise of some of the most highly credentialed professionals in the industry with certifications including Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), Certified in Financial Forensics (CFF), Certified Management Accountant (CMA), Chartered Global Management Accountant (CGMA), Certified Fraud Examiner (CFE), and Certified QuickBooks ProAdvisor. If you have any questions regarding how to maximize your financial future, please do not hesitate to give us a call and we would be more than happy to set up an appointment to analyze your financial situation. I am confident that we will be able to help you maximize your home mortgage deductions and so much more. Sincerely yours,

Joshua V. Azran CPA/ABV/CFF, CMA, CGMA, CFE Partner/Owner, Azran Financial APC
Azran Financial APC 2012. All rights reserved.

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