May I respectfully suggest that you also point your clients to IRS
Publication 909. I don't have the page number since I access this
document electronically. But there is a small section devoted to this
item - it reads:

"CERTAIN HOME MORTGAGE INTEREST (LINE 4). For AMT purposes, you cannot
deduct interest on a home mortgage:

* Taken out after June 30, 1982, and used for a purpose other than
to
buy, build, or substantially improve your main home or qualified
dwelling that is your second home, or

* Taken out before July 1, 1982, and secured by property that, when
you
got the mortgage, was other than your main home or a qualified
dwelling used by you or a member of your family.

A qualified dwelling is any house, apartment, condominium, or mobile
home
not used on a transient basis.

If you refinanced your mortgage after June 30, 1982, for an amount
in
excess of your original mortgage, you cannot deduct the interest
related to the excess.

Enter on line 4 of Form 6251 the total included on lines 9a, 9b, and
10
of Schedule A for these home mortgage interest items."

As a tax professional, I do appreciate your diligence in advising your
clients to get professional advice. Unfortunately, too many people
today think they can prepare their own returns without professional
assistance. While some can do a good job, many more do an incomplete
job.

I'm finding that almost all of my "new" clients have had some IRS
difficulty and are coming to me now because their versions of the
return raised flags that caused them more in penalties and interest
than my fee would have been.

Regards,
Gene E. Utterback, EA, RFC


$cott wrote:
- quote -

I believe the author does a more then adequate job in making an
argument for both leverage and diversification (seperating the equity
from your home is a form of diversification) in his first (and more
extended) version of Missed Fortune.

Having no stock portfolio and mortgage would present the following
downsides/risks:

a. The cost of lost opportunity (appreciation in equity investment)
b. The loss of tax deductability
c. The loss of positive leverage

These are some of the arguments debated in the book and consulting a
financial planner might yield few more.

Regards,

Scott Miller
Commericial and Residential Lender/Broker

www.RealEstate-IQ.com
www.EZMortgageLoanz.com




- quote -

What do I tell my clients:

"IRS Publication 936 (page 11) stipulates an allowance for mortgage
interest deductions on home equity debt not to exceed 100K (50K for
unmarried/single filers). If the proceeds of the HELOC or second
mortgage are used for investment, business or another deductible event,
the interest may also deductible. These matters should be reviewed
with a tax professional in order to determine the extent of
deductability for your particular circumstances. Do you have an
accountant? (If no, I refer them to one of my partners for a free real
estate tax review)"

I'm careful to give advice on what I know and outsource what I don't.

Regards,

Scott Miller
Commercial and Residential Lender/Broker

www.RealEstate-IQ.com
www.EZMortgageLoanz.com



- quote -

$cott wrote:
- quote -


Once again - as long as you factor in the effect of the AMT for the
equity interest!

Using equity loan proceeds for anything other than the acquistion or
improvement of your principal home requires the interest to be treated
as an AMT adjustment item. If you use the proceeds to purchase
investments then the investment interest rules MAY apply.

Our of curiosity, when you talk to your clients about home equity loans
do you warn them about the possibility of AMT being an issue?

Be careful,
Gene E. Utterback, EA, RFC

"$cott" <ezmortgageloanz[at]aol.com> writes:

- quote -

I've been thinking about this lately in the sense of
getting better diversification of one's assets rather
than just as a means of leveraging.

Suppose, say, an individual with $500,000 in assets.
He could buy a $500,000 house and then his entire
net worth is (a) tied up in real estate and (b) illiquid.
Or he could take, say, a $300,000 mortgage and buy
$300,000 worth of a diversified stock portfolio. His
net worth is identical - $500,000, but now he's got
exposure to both the the (global) stock market as well
as to his local real estate market. In the long run,
this may be a lower-risk portfolio, even with the
leverage involved. Whether he's got a mortgage or not,
he's got exposure to the local real estate market -
both upside and downside. Without the mortgage and
stock portfolio, he's got no exposure to anything else.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Here a post from a few months ago that argues the pros and cons of the
Missed Fortune principles.

http://groups.google.com/group/misc....707?q=%24cott&

Regards,

Scott Miller
Commercial and Residential Lender/Broker

www.RealEstate-IQ.com
www.EZMortgageLoanz.com

You need to read his orginal book entitled Missed Fortune to truly
understand the author's intent. The author (Andrew Douglas) is a CFA,
so it would make sense that insurance would be covered in his
recommendations. I have read both books, and I believe the underlying
theme is arbritrage (borrowing at a lower interest rate and investing
it in "something" that yields a higher rate). Borrowing against equity
(or seperating equity from your home) is a means for alot of
individuals to address half the equation (borrowing at lower interest
rates).

Regards,

Scott Miller
Commercial and Residential Lender/Broker

www.EZMortgageLoanz.com
www.RealEstate-IQ.com

jjlindula[at]hotmail.com wrote:
- quote -

The book is more about creating abritrage then anything else. The book
doesn't suggest taking a home equity loan it suggest seperating equity
from the home; the book favors investing the home equity into an
investment yielding a higher interest rate then the mortgage rate over
converting non-deductible consumer debt into deductible mortgage
interest (although the author makes a compelling argument for the
conversion of non-secured consumer debt into mortgage interest). If
you had plans to pay off your consumer debt and car in 5 years and are
disciplined enough to stick to these plans, converting it to mortgage
interest with the same intent (of paying it off in 5 years) only makes
sense.

Regards,

Scott Miller
Commercial and Residential Lender/Broker

www.EZMortgageLoanz.com
www.RealEstate-IQ.com

jjlindula[at]hotmail.com wrote:
- quote -

There's an article on home equity loans at
http://loans.webexpresslane.com/home_equity_loans.html
that may help. Personally, I'd discuss the whole thing with someome at my
bank.

<doylekimberly[at]hotmail.com> wrote in message
- quote -

Now you've piqued my interest. What vehicle gives 10% average annual return
with a principal-back guarantee? I'd bet that the mutual funds that underly
this kind of insurance have this kind of return, but then one must pay for
that principal-back feature, too, no?

-Will

HW "Skip" Weldon wrote:
- quote -

It depends. Multiple loans that are necessary for the acquisition of
the home are considered together. For example - with an 80/10/10 (with
no cash down) all three loans are consider acquisition debt regardless
of the size of the combined debt, up to the $1M limit.

By the same token - a borrower who started life with a high interest,
low equity 80/10/10 and who has now paid the loan down and refinanced
when rates are low could easily wind up with a single mortgage that
replaced the three originals. Now, same situation but they take out
$150K on the refi - for mortgage purposes they may have a similar or
lower payment, but some of the mortgage relates to an equity draw (up
to $100K) and some is simply lost. Even if the refi with the cash out
is for less than the original aggregated loans.

We have to look at the structure of the loan or loans and not on the
number of loans oustanding at any particular point in time.

Gene E. Utterback, EA, RFC

doylekimberly[at]hotmail.com wrote:
- quote -

It doesn't take a PPT to explain this and I think discussing whether
home equity is stagnant or not complicates the question. It's
essentially investing on margin, plain and simple. You just happen to
use the HELOC or mortgage as a source of funds instead of your margin
account. If you draw up a personal balance sheet though it looks the
same...bigger asset (investment or whole life policy or whatever) but
bigger liabilty offsetting it (mortgage and/or HELOC).

And whether that pays off will get down to a horse race between the
earnings on the asset (after tax and costs) and the cost of carrying the
debt. This is the generic "margin investing" question, really. In
principle any investor who borrows at X% and earns X+1% on the money is
going to "win". But in application, I think only a small minority of
individuals should actually bother with margin investing. It shouldn't
be preached as a technique useful to the typical individual...not in an
environment where the US doesn't even have a a positive overall savings
rate.

But sure, there is even an argument for NEVER acquiring any home equity,
because as the argument goes, a home value rises irrespective of how
much debt you carry on it. Of course, at that point you're simply
renting the home from the bank, and taking on any downside risk (and
maintenance, insurance, and tax costs) in exchange for upside potential.
And given that so many individuals have little or no wealth outside of
home equity, it seems risky to recommend that people borrow THAT out and
stick it in investments or an insurance policy.

That's why I said I consider this a somewhat esoteric technique, not too
far removed from say buying additional securities using a margin
account. Might pay off but it's got its risks. And the "missed fortune"
could very well end up being "by the time I retired I still owned only
10% of my house, and the turtle next door just tore up his paid-off
mortgage."

-Tad

Here is a simple PowerPoint presentation that may be helpful in
understanding how a HELOC
works......http://www.smithman.net/downloads.html......life insurance
companies offer segregated funds that have a maturity guarantee applied
to your principal investment ( if you investment is held to a maturity
date you are guaranteed the greater of 75 to 100% of your principal or
the book value of the investment). A HELOC helps you free up equity
that essentially just sits there until you sell your home. I have not
read this book, but the book may be suggesting that instead of
investing in straight mutual funds (where u risk loosing your principal
investment), a strategy around this may be investing in segregated
funds protected by insurance companies

Here is another way to think about it.......if you put $100 in an
envelope (think of this as your equityin your home) for 10 years...then
open it up 10 years later...how much money do you have? (also remember
that over the long term houses will have a rate of return of 3 to 5%)

Versus

If you put that $100 in an investment tool that over the same period of
time has an average rate of return of say 10% annually (with a
quarantee that if the market happened to go south- you will get back
your principal investment)?

Where will you be?

Hope this helps

jjlindula[at]hotmail.com wrote:
- quote -

You may wish to read: Debt Consolidation: A Sensitivity Analysis
http://www.fpanet.org/journal/articl...p1205-art8.cfm

---
Fred J. Tydeman Tydeman Consulting
tydeman[at]tybor.com Testing, numerics, programming
+1 (775) 358-9748 Vice-chair of J11 (ANSI "C")
Sample C99+FPCE tests: http://www.tybor.com
Savers sleep well, investors eat well, spenders work forever.

"Mechanics of Money Financial BBS" <bbs[at]mechanicsofmoney.com> writes:

- quote -

Better double-check your "mechanics". :-)

That's incorrect.

The interest on loans secured by your home deduction is available for
funds used for any purpose, except that interest allocable to
non-acquisition, non-improvement debt in excess of $100,000 is not
deductible (and all interest allocable to non-acquisition,
non-improvement debt is not deductible under the AMT).

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

jjlindula[at]hotmail.com wrote:
- quote -

Joe,
This book gets criticized a lot because as another poster noted it
smells suspiciously like a scheme to sell people a lot of life
insurance. The basic idea seems to be keeping a large amount of debt on
your home and diverting the dollars that would go into repayment into
something else. The author, I believe, suggests diverting the dollars
into a life insurance policy based on the tax deferral and some other
rationales (I should mention that I haven't actually read the book but
may have read an equivalent amount of text in commentary about the book!).

I really wouldn't call that the "starter kit to becoming a millionaire"
because in effect, it's advocating that you not build up home equity,
and that you invest (or pay insurance premium with) the difference.
Essentially - investing on margin.

Now, sure, you can make money that way but "starter kit"? Come on. As
noted in an earlier thread on the recent survey of US consumer finances,
that hardly seems the recipe for getting wealthy. Home equity is the
only equity a lot of people have, with very little savings alongside it
(whether in investments or insurance policies). So it seems kind of
silly to then advocate, in a general-interest book, that people divert
dollars away from even that.

I'd put this in the category of more-esoteric ways of building wealth,
suitable for a special kind of individual...rather than the "formula for
becoming a millionaire". I mean really, if I were to write a book that
is truly a "starter kit" to becoming a millionaire, it would be three
sentences long:

Spend at least $5,000 less than you earn, year in and year out. Stick
the $5,000 in a low-cost balanced index fund. Wait.

I'd update the book every two years to adjust the "$5,000" figure.

-Tad

On Thu, 2 Mar 2006 17:19:44 -0600, gene[at]alliancetax.com wrote:

- quote -

Very helpful post. I am always impressed by the amount of stuff I
don't know.

In this case, I assume that first and second mortgages are combined
for the $1M amount; equity lines of credit are considered separately
up to $100,000. Yes?


-HW "Skip" Weldon
Columbia, SC

jjlindula[at]hotmail.com wrote:
- quote -

The title of the book raises flags for me.

- quote -

While that may reduce the interest rate, it is generally not advised to
secure these debts with your home. Worst scenario, you could lose your
home.

- quote -

People have this obsession with deductions. Would you rather have a
interest deductible 8% loan or a non-deductible 5% loan? I think a lot
of people would (incorrectly) take the deductible loan. What is your
auto loan interest rate? Compare it to the after-tax home equity rate.
If the after-tax home equity rate is far lower, then maybe consider it.
Otherwise, it's not worth risking your home!

jjlindula[at]hotmail.com wrote:
- quote -

You need to be VERY VERY careful with this, there are traps that most
people - INCLUDING PROFESSIONALS - miss.

First - be careful about using your home to secure a disposable asset.
If things get tight you can live with a car being repo'd, but to have
your house repo'd because you can't make a car payment is foolish.

Second - be careful about converting short term debt into long term
debt. A lower payment doesn't mean you're paying less - paying for a
car over 10 or 15 years is not a smart move.

Third (this is where a lot of pros fail to properly advise their
clients) - Mortgage proceeds that are used for anything other than the
acquisition or improvement of your home are a Tax Adjustment Item for
the Alternative Minimum Tax! You may be able to deduct the interest on
Schedule A - for mortgages up to $1M and for Equity Loans up to $100K -
but the mortgage interest gets added back when AMT is calculated.

Every year I get at least 6 clients who come in talking about how they
refinanced the house and took out enough cash to pay off the credit
cards, pay off the cars, buy new cars, go on vacation, put the kids
through school - whatever. The last couple of years, most start out
bragging that they actually took out $40K or $50K but their payment
actually dropped because of the lower interest rates. Then they sort
of go pale when they find out that the interest related to that portion
of the mortgage gets added back when we calculate AMT.

Lastly (this is another area when some pros drop the ball) - Mortgage
interest related to acquisition debt is deductible BUT once it is paid
down it can never be increased. For example - say you buy a house for
$500K; you have some proceeds from the sale of your old home so you put
$300K down and you finance $200K. Your acquisition debt is $200K. Now
you pay on that loan for 10 years then aunt tilly dies and leaves you
enough cash to pay off the balance - so you do.

Now its time for the kids to go to college; the house has increased in
value to $1M and it is paid for. So you decide to borrow $250K and put
little Johnny through Harvard.

The interest on the first $100K is deductible on Schedule A BUT is an
adjustment item for AMT.

The interest on the rest of the loan is LOST - not deductible at all,
anywhere!

Be very, VERY careful about using mortgage debt for anything other than
acquiring your property.

Good luck,
Gene E. Utterback, EA, RFC

I agree with the other responses. I would add that the mortgage
interest deduction is only available for funds associated with your
house (there are some technical terms for this, such as "acquisition
indebtedness"), not for your car. Thus, you would have to be dishonest
on your tax return to report that deduction...


Gary Brolis
http://www.MechanicsofMoney.com
http://www.MechanicsofMoney.com/blog.php