deductability of heloc interest

[bandb]

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,

[TaxGuyBill]

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]

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.

[IRonMaN]

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.

[bandb]

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. 

[BobKamman]

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]

Good Point. Thanks!

[abctax55]

*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. 

[bandb]

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]

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]

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

[BobKamman]

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]

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.

[bandb]

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.

[BobKamman]

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]

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.