Should my parents HELOC their house?

NEW -> Contingent Buyer Assistance Program
[quote author="ipoplaya" date=1213881215]awgee, please enlighten me as to how the use of funds will influence the deductibility of interest on $100K of HELOC debt. <a href="http://www.irs.gov/pub/irs-pdf/p936.pdf">I glanced at Pub 936</a> and can't find anything that would suggest my answer is incorrect. Can you provide section references?</blockquote>


Whoops, missed the section about not deducting interest if the proceeds went toward the purchase of tax-exempt securities. Is that the only use limitation that would make interest on $100K of home equity debt non-deductible?
 
[quote author="PadreBrian" date=1213874982][quote author="tenmagnet" date=1213849979]C?mon man, what kind of silly question is that.

Absolutely, no question he should heloc it and take the money while the getting?s good.



Have him break you off 1/3 (300K) of the $1M so you can get something ?decent? in Northpark along with a new 6-series rather than those lame condos and 3-series you keep posting about.

This is the Finals my man, time to up your game.



If that doesn?t work, convince him to sell to me and I?ll kick you a sweet spiff.

Why should the agent get it and not you?

Win-Win!</blockquote>


:lol:</blockquote>




har har Ten. I almost bought a used six series but the things slurp gas like its going out of style. (I suppose it is, isn't it?).



And while that'd be nice, my parent's idea of 'helping me out' financially is free baked goods and my Father letting me use his toll road transponder.
 
[quote author="ipoplaya" date=1213882084][quote author="ipoplaya" date=1213881215]awgee, please enlighten me as to how the use of funds will influence the deductibility of interest on $100K of HELOC debt. <a href="http://www.irs.gov/pub/irs-pdf/p936.pdf">I glanced at Pub 936</a> and can't find anything that would suggest my answer is incorrect. Can you provide section references?</blockquote>


Whoops, missed the section about not deducting interest if the proceeds went toward the purchase of tax-exempt securities. Is that the only use limitation that would make interest on $100K of home equity debt non-deductible?</blockquote>


Examples would probably be better than the explanation:


1)

Taxpayer's home appraises at $300,000 and property has existent $185,000 first mortgage. Taxpayer may HELOC $100,000 and use the money for anything legal and the interest on the full $100,000 is deductible as mortgage interest.


<p>

2) Same, except property has existent $275,000 first mortgage on appraised value of $300,000 and takes HELOC for $100,000. If the $100,000 is used on the property the full interest is deductible. If it is used for other stuff, only $25,000 is deductible as mortgage interest.


And there may be other limitations based on use of funds determined by the taxpayers income, but my little mind can not possibly go into that here.


I'll see if I can find the code.
 
Ipop - The following is applicable language from pub 936. Like 95% of tax language it is written to explain what isn't instead of what is.




<strong><i>from pub 936</i></strong>

If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt.




Home equity debt is a mortgage you took out after October 13, 1987, that:




Does not qualify as home acquisition debt or as grandfathered debt, and



Is secured by your qualified home.
..<p>



Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:


$100,000 ($50,000 if married filing separately), or




The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.


<strong><i>me again</i></strong>


In my examples from my last post: in example 1) The whole $100,000 would be considered qualified home equity debt.


in example 2) if the taxpayer spends the $100,000 on the property, the first $25,000 is home equity debt and the $75,000 is home equity debt and all the interest is deductible, because the $75,000 is more than the home acquisition debt limit and it does not qualify as home acquisition debt and it <strong>WAS</strong> used to buy, build, or substantially improve the home.


But if taxpayer spends the $100,000 on a personal use Ferarri, only the $25,000 is home equity debt, and the $75,000 is personal, non-deductible debt.


The IRS makes it's own definitions and it is confusing as heck. When someone reads "home equity debt", they think "HELOC", but not the IRS. HELOC does not equal "home equity debt". They make up their own definitions.


Have I made this more clear or more confusing?
 
[quote author="awgee" date=1213908547]Have I made this more clear or more confusing?</blockquote>


Yes sir, you have. I think I get it pretty well now, thanks. Your sage tax advice is always useful. One more question though... I assume when one refinances a purchase mortgage, the refinance debt is also considered home acquisition debt but only up to the original amount of the purchase mortgage?
 
[quote author="25w100k+" date=1213888973][quote author="PadreBrian" date=1213874982][quote author="tenmagnet" date=1213849979]C?mon man, what kind of silly question is that.

Absolutely, no question he should heloc it and take the money while the getting?s good.



Have him break you off 1/3 (300K) of the $1M so you can get something ?decent? in Northpark along with a new 6-series rather than those lame condos and 3-series you keep posting about.

This is the Finals my man, time to up your game.



If that doesn?t work, convince him to sell to me and I?ll kick you a sweet spiff.

Why should the agent get it and not you?

Win-Win!</blockquote>


:lol:</blockquote>




har har Ten. I almost bought a used six series but the things slurp gas like its going out of style. (I suppose it is, isn't it?).



And while that'd be nice, my parent's idea of 'helping me out' financially is free baked goods and my Father letting me use his toll road transponder.</blockquote>


Poor gas milage shouldn?t even be in your thought process when considering upgrading your ride.

Instead, you should focus on elevating yourself above the rest of the tools driving the standard 6-series in the OC.



Here?s my advice, listen closely.

Buy the car, immediately drop an additional $15K-$20K for aftermarket upgrades.

An AC Schnitzer body kit with dual-chrome exhaust, side skirts, 19s, and a front air dam would make that car look absolutely wicked, definite head-turner.

Think about all the attention you?ll get pulling up to 3-Thirty-3 or Sutra in that ride.

?Pageant quality? girls my friend, that?s what I?m talking about.

A life goal you can truly be proud of.
 
[quote author="ipoplaya" date=1213916423][quote author="awgee" date=1213908547]Have I made this more clear or more confusing?</blockquote>


Yes sir, you have. I think I get it pretty well now, thanks. Your sage tax advice is always useful. One more question though... I assume when one refinances a purchase mortgage, the refinance debt is also considered home acquisition debt but only up to the original amount of the purchase mortgage?</blockquote>


Actually, the portion of the refinance that is considered home acquisition debt is the amount of the balance of the old mortgage principal just before the refinancing, not the amount of the original purchase mortgage. If you borrow more than the mortgage balance, it may be considered home equity debt and subject to home equity debt limitations.


So-o-o-o-o, anybody who has kept up with Ipop and I during this fascinating discussion, you may be wondering, "Does this mean that if someone refinances and ATMs more than $100,000 out of their equity, a maximum of $100,000 of the extraction can be used for mortgage deduction purposes?"


Yes, that is exactly what it means. Uh-0h.
 
[quote author="awgee" date=1213930700][quote author="ipoplaya" date=1213916423][quote author="awgee" date=1213908547]Have I made this more clear or more confusing?</blockquote>


Yes sir, you have. I think I get it pretty well now, thanks. Your sage tax advice is always useful. One more question though... I assume when one refinances a purchase mortgage, the refinance debt is also considered home acquisition debt but only up to the original amount of the purchase mortgage?</blockquote>


Actually, the portion of the refinance that is considered home acquisition debt is the amount of the balance of the old mortgage principal just before the refinancing, not the amount of the original purchase mortgage. If you borrow more than the mortgage balance, it may be considered home equity debt and subject to home equity debt limitations.


So-o-o-o-o, anybody who has kept up with Ipop and I during this fascinating discussion, you may be wondering, "Does this mean that if someone refinances and ATMs more than $100,000 out of their equity, a maximum of $100,000 of the extraction can be used for mortgage deduction purposes?"


Yes, that is exactly what it means. Uh-0h.</blockquote>


They are all probably cheating on their taxes and deducting every penny of interest...
 
[quote author="awgee" date=1213930700]Actually, the portion of the refinance that is considered home acquisition debt is the amount of the balance of the old mortgage principal just before the refinancing, not the amount of the original purchase mortgage.</blockquote>


Wow, so if you bought a place with an original $500K purchase mortgage on a neg-am loan and paid the minimum for a few years, once you refinanced you'd get to roll all that into principal growth into the home acquisition debt class for tax purposes? There is some kind of sick and twisted lesson in that somewhere... Better to have a neg-am vs. a regular amortizing mortgage and a HELOC I guess.
 
[quote author="ipoplaya" date=1213943742][quote author="awgee" date=1213930700][quote author="ipoplaya" date=1213916423][quote author="awgee" date=1213908547]Have I made this more clear or more confusing?</blockquote>


Yes sir, you have. I think I get it pretty well now, thanks. Your sage tax advice is always useful. One more question though... I assume when one refinances a purchase mortgage, the refinance debt is also considered home acquisition debt but only up to the original amount of the purchase mortgage?</blockquote>


Actually, the portion of the refinance that is considered home acquisition debt is the amount of the balance of the old mortgage principal just before the refinancing, not the amount of the original purchase mortgage. If you borrow more than the mortgage balance, it may be considered home equity debt and subject to home equity debt limitations.


So-o-o-o-o, anybody who has kept up with Ipop and I during this fascinating discussion, you may be wondering, "Does this mean that if someone refinances and ATMs more than $100,000 out of their equity, a maximum of $100,000 of the extraction can be used for mortgage deduction purposes?"


Yes, that is exactly what it means. Uh-0h.</blockquote>


They are all probably cheating on their taxes and deducting every penny of interest...</blockquote>
Or, most are ignorant of the details, including their tax preparer. For a few years my advice to people was to use TurboTax and self prepare their taxes. I stopped giving that advice, because I found that most people will make mistakes on their return. Just look at how convoluted the code is for "home equity debt" and HELOCs. There are foreign income situations which I am sure a self preparer will screw up 99% of the time no matter what software they use and professionals will mess up most of the time also.
 
[quote author="ipoplaya" date=1213944047][quote author="awgee" date=1213930700]Actually, the portion of the refinance that is considered home acquisition debt is the amount of the balance of the old mortgage principal just before the refinancing, not the amount of the original purchase mortgage.</blockquote>


Wow, so if you bought a place with an original $500K purchase mortgage on a neg-am loan and paid the minimum for a few years, once you refinanced you'd get to roll all that into principal growth into the home acquisition debt class for tax purposes? There is some kind of sick and twisted lesson in that somewhere... Better to have a neg-am vs. a regular amortizing mortgage and a HELOC I guess.</blockquote>
Please understand that I can not address every situation in my answers, but here is applicable language straight out of pub 926:


If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. The additional debt may qualify as home equity debt.
 
[quote author="tenmagnet" date=1213920335][quote author="25w100k+" date=1213888973][quote author="PadreBrian" date=1213874982][quote author="tenmagnet" date=1213849979]C?mon man, what kind of silly question is that.

Absolutely, no question he should heloc it and take the money while the getting?s good.



Have him break you off 1/3 (300K) of the $1M so you can get something ?decent? in Northpark along with a new 6-series rather than those lame condos and 3-series you keep posting about.

This is the Finals my man, time to up your game.



If that doesn?t work, convince him to sell to me and I?ll kick you a sweet spiff.

Why should the agent get it and not you?

Win-Win!</blockquote>


:lol:</blockquote>




har har Ten. I almost bought a used six series but the things slurp gas like its going out of style. (I suppose it is, isn't it?).



And while that'd be nice, my parent's idea of 'helping me out' financially is free baked goods and my Father letting me use his toll road transponder.</blockquote>


Poor gas milage shouldn?t even be in your thought process when considering upgrading your ride.

Instead, you should focus on elevating yourself above the rest of the tools driving the standard 6-series in the OC.



Here?s my advice, listen closely.

Buy the car, immediately drop an additional $15K-$20K for aftermarket upgrades.

An AC Schnitzer body kit with dual-chrome exhaust, side skirts, 19s, and a front air dam would make that car look absolutely wicked, definite head-turner.

Think about all the attention you?ll get pulling up to 3-Thirty-3 or Sutra in that ride.

?Pageant quality? girls my friend, that?s what I?m talking about.

A life goal you can truly be proud of.</blockquote>


Try buying a Hydrogen powered car. Gas is $5.00 a gallon, Hydrogen is $4.00 a gallon with zero emissions. Plus there's a fueling station in Irvine
 
<blockquote>

Here?s my advice, listen closely.

Buy the car, immediately drop an additional $15K-$20K for aftermarket upgrades.

An AC Schnitzer body kit with dual-chrome exhaust, side skirts, 19s, and a front air dam would make that car look absolutely wicked, definite head-turner.

Think about all the attention you?ll get pulling up to 3-Thirty-3 or Sutra in that ride.

?Pageant quality? girls my friend, that?s what I?m talking about.

A life goal you can truly be proud of.</blockquote>


Haha... that is some of the worst advice ever! I really hope you were kidding! Seriously thought I'm a mechanical engineer and I work in the automotive aftermarket. Rule of thumb is you would be lucky to ever get a return of 30% on the aftermarket parts when it comes time to sell the car. Cars are a real waste of money... that is unless you bought a 1960s Shelby AC Cobra in the '70s gas crunch like my grandpa. He paid $2000 bucks for that car used. It is a genuine car and personally confirmed to be authentic by Carroll Shelby himself. That car is owned by the family trust fund and is worth about the same as a 20% down payment on a real nice home.



A life goal you can be truly proud of is a "Pageant quality" girl who can score a 1400+ on the SAT or 130+ on an IQ test who doesn't know she is a hottie and makes at least 60-70K at the START of her working life. As the late and great Mac Dre said "i flipped the script and stopped f*uckin' for free every b*tch i did down had to kick down who ever i tossed up had to cough up young in da game man but quick to learn that money makes this world turn"
 
[quote author="maple" date=1214275175]A life goal you can be truly proud of is a "Pageant quality" girl who can score a 1400+ on the SAT or 130+ on an IQ test who doesn't know she is a hottie and makes at least 60-70K at the START of her working life. As the late and great Mac Dre said "i flipped the script and stopped f*uckin' for free every b*tch i did down had to kick down who ever i tossed up had to cough up young in da game man but quick to learn that money makes this world turn"</blockquote>


A 1400 SAT is like 35th percentile... I'd expect someone with a 130+ IQ to do much better than that.
 
[quote author="ipoplaya" date=1214295564][quote author="maple" date=1214275175]A life goal you can be truly proud of is a "Pageant quality" girl who can score a 1400+ on the SAT or 130+ on an IQ test who doesn't know she is a hottie and makes at least 60-70K at the START of her working life. As the late and great Mac Dre said "i flipped the script and stopped f*uckin' for free every b*tch i did down had to kick down who ever i tossed up had to cough up young in da game man but quick to learn that money makes this world turn"</blockquote>


A 1400 SAT is like 35th percentile... I'd expect someone with a 130+ IQ to do much better than that.</blockquote>




I suspect that Maple isn't aware that the SATs switched from 2x800pts to 3x800pts a couple years ago.



IQ (mean = 100; standard deviation = 15 or 16)

SAT or GRE (mean = 500; standard deviation = 100



Two Standard Deviations on each side of the mean contains 95.44% of scores



so in fact IQ=130 is the same as SAT=700 (per part), about the top 2.5%
 
My opinion is that you should NOT HELOC. If there is 400k left on the mortgage, the real missing value here is what is the house worth? You said his income is small in ratio to his mortgage, but if he is your father, what is the real potential of future income? How old is he, is he as risk of losing his job in this economy?



If you get a HELOC, it is basically a loan. The main benefit is a lower interest rate, but the down side is that it is secured by your home. So if prices continue to go down, even below the HELOC upon which you "cashed out equity" (whatever that means) then you still owe a higher amount then the house is worth! If you make a conservative 7%, how much do you think HELOCS are going for in this credit market? Maybe if you are lucky 4%, which is a spread of only 3%.



In other words, pay off the house and dont get any loans on it until the RE market restabilizes. These are conservative times and a HELOC might be risky. Ask a professional.



Also, you should keep in mind that there might be differences of law when you get a HELOC. Finding a good Real Estate lawyer or financial/mortgage lawyer and paying him a couple hundred dollars to explain the consequences of a second mortgage or HELOC might be worth your time/money, depending on what possibilities occur in the future.
 
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