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Mortgage Tax Question...HELP

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Money Talk > Taxes

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bim94
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Mortgage Tax Question...HELP  Reply with quote  

I purchased a property in February 2006 for which I live. I sold a property 5 years ago on a land contract, and the new "owners" make religious monthly payments. For the year ending 2006, I received about $8,000 in interest from the payments for the property I sold. Having no other loans, the total mortgage interest that I paid in on my current home purchased in February was also roughly $8,000. It seems to me that the interest paid SHOULD shelter the interest received. It does not. Since this year I do not have any other expenses to itemize, I will take the standard deduction ($10,300 for married jointly filing).

Could my mortgage interest paid in somehow be used to reduce my gross income as a business expense for financing the "sold" property. To me, it does not seem fair that I have to use almost the entire portion of my standard deduction just to "cover" the interest income from the financed property. If I owned a finance company, borrowed money secured by personal assets, and loaned it out at a higher rate than I borrowed to make a profit, wouldn't the interest paid on that note be a business expense fully deductible? What is the difference here? Not trying to circumvent any tax laws here, but I just would like to understand why. What can I do? Thanks in advance.
Post Fri Jan 26, 2007 7:11 pm
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bim94
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quote:
Originally posted by coaster
I might be a little confused. It sounds like you're expecting one sort of deduction to offset a similar sort of income. Deductions are deductions. Income is income. If your mortgage interest paid is your only deduction and it's less than the standard deduction, you take the standard deduction. When you take the standard deduction, your mortgage interest won't offset income. Don't you have any other deductions? State income tax is a good one for bumping deductions over the threshold.

I don't think you can switch accounting from a personal transaction to a business transaction midstream.

Getting a copy of TurboTax or TaxCut will enable you to what-if your tax return scenarios.


I appreciate the feedback. I'll respond by speaking to those on this forum that can provide some insight other than by purchasing computer software. Rolling Eyes

I understand how the standard deduction works with regard to itemizing. However, I also realize that personal deductions whether they are itemized or standard are taken after the AGI is calculated. Business "losses" offset total income (line 17 of 1040). The reason I don't buy that "deductions are deductions" is that certain tax credits are based on your AGI. A person's taxable income is affected by either itemized or standard deductions, but a their AGI is not. What makes it so that the interest that I pay on a bank note cannot be characterized as a "business" expense? I also own rental property in a llc where the mortgage interest I pay offsets the rent I collect. Do I need to set up an S-corp or somthing to be able to characterize the interest this way? For instance, if I held a note in the name of an S-corp specifically set up to finance land contracts, wouldn't the interest I paid in on that note be an expense and the difference between that interest and the land contract interest income be reported on line 17? Again, thanks in advance for any responses.
Post Sat Jan 27, 2007 1:06 am
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bim94
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Thanks to you, coaster (with the help of TurboTax), again.

I think everything you are presenting is reinforcing the response I am looking to get. I did not mention in my first post that the property I sold on contract 5 years ago is a rental property because it was not, although I do not necessarily see how it would affect the situation here. I used the rental property I do own (and use schedule E to come up with gains and losses to submit on my personal 1040) to illustrate a point. The point being that in a business, certain loan interest is considered an expense.
In the interest providing clarification, again I ask, what if I set up a business for which I secured a different note and it involved paying interest. As you say,

"The interest on a note is a business expense if it's a note for conduct of a business and is reported on Schedule C. It's not deductible dollar for dollar against earned income, but offsets any business income reported on Schedule C."

The business income in this case would be the interest income from the land contract.

The whole point here is this...I owned a house outright and right or wrong I sold it on contract 5 years ago. Now, I own a personal residence with a mortgage and mortgage interest. Even if I did itemize, it would all go towards sheltering the $8,000 in interest income from the land contract. Would it not be better to secure say a "business" loan to finance that land contract, offset the interest I pay against the interest I receive (on schedule C), use the proceeds from the business loan to pay off my existing home mortgage, and keep using the standard deduction, all while lowering my AGI?

...as my wife says when I go into a stubborn ranting, "the more you try to clarify, the more confusing you get"

[/quote]
Post Sat Jan 27, 2007 2:35 am
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efflandt
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Since you bought your home in 2006, if 2006 property taxes are due in 2007 you would not have that tax deduction yet. But you will in future years (from date of closing to end of 2006 in 2007, and full tax deduction for 2007 tax in 2008).

Although, if you had known amount of property tax due in 2007, you could have paid that before Dec 31, 2006 (unless escrowed). I did that for land I own in WI (tax bill Dec 2006, due Jan/July 2007), but cannot do that for my home in IL (2006 tax bill not mailed until May 2007).

State income tax (or state sales tax) is also deductable.
Post Sat Jan 27, 2007 8:12 pm
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bim94
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Thanks for the comments. My itemized deductions would be my state income tax (Iowa)...about $2000, mortgage interest...about $8000, and real estate taxes (next year)...about $2000. With maybe a $1000 in miscellaneous dedections the total would be $13,000. Missing out on the difference between the itemized and standard ($13,000 - $10,300) is not as concerning as having to claim the $8000 in mortgage interest "income" on page 1 of 1040.

Looking back, I wishI had purchased my personal residence in the name of my LLC that holds the other rental property. Then, maybe I could have rented the property to myself (at a very reasonable cost) and the interest paid on the note would be lumped in with the other rental property expenses.
Post Sun Jan 28, 2007 5:53 pm
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