Ian Pilcher <i.pilcher[at]comcast.net> wrote:

- quote -

If it is a "personal (non-business) loan," the interest
ISN'T deductible.

- quote -

I think you have misconstrued 461(g)(2) - which, I concede,
is confusing paragraph. What it does, by "excepting" home
mortgage points from the prepaid interest rule stated at
461(g)(1), is allow "the Secretary" to develop rules under
which points may be deducted IN FULL in certain
circumstances.

See Rev Proc 87-15 for a discussion of the simplified
calculation rules related to "points."

MTW

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Ian Pilcher wrote:

- quote -

Section 461 doesn't authorize a deduction--rather, it
controls only the *timing* of otherwise authorized deductions.

Section 163 controls the general deductibility of interest.
Points paid are interest under the definitions involved
(in fact, you find that Section 461(g) only deals with
amounts that are interest--and it doesn't define interest).
What Section 461(g) does is impact *when* that deduction
will be taken by a cash basis taxpayer who normally takes a
deduction when the amount is paid.

So you don't *need* Section 461(g) to allow the deduction of
prepaid interest. If Section 461(g) was repealed, all
otherwise deductible interest would deductible when paid by
a cash basis taxpayer under the authority of Section 163.
What Section 461(g) does, rather, is *delays* the
deduction--much like nearby section 469 does for passive
activity items.

In fact, the entire subpart in which that provision is found
is titled "Taxable Year for Which Deductions Taken"
indicating that these are timing sections rather than
allowance sections. All of them deal with items that are
otherwise allowed by another provision in the IRC (generally
in Subchapter B).

--
Ed Zollars, CPA
Phoenix, Arizona

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Ian Pilcher wrote:

- quote -

I assume your concern is with why they aren't amortized into
the interest stream as opposed to being taken on a straight
line basis. Well, Section 461(g) doesn't actually say how
to determine the period to which they are allocable--just
that they have to be allocated. Note that the regulation
for this provision is still, after all these many years,
"reserved" and so it would seem any reasonable method of
allocation is acceptable.

Clearly, the IRS has indicated that they will accept
straight line as a method in this case.

- quote -

How does a car relate here? Personal interest paid is now
blocked from deduction, and if it traces to the car as a
*personal use* asset then it's personal interest when paid.
The dealer isn't relevant on his end, either, since only
the *obligor* is covered by Section 1275(b)(2)--and, as
noted, if the borrower has personal use property, then we
have an interest problem right off.

- quote -

It says g(1) shall not apply. 461(g)(1) forces an economic
allocation. The IRS has, as I recall, ruled later that you
still *could* use the 461(g)(1) method, as they read (g)(2)
just to mean *they* can't force you to use that method. I
don't know that it actually reads that way, but I doubt
anyone is going to challenge them.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Michael T Wing CPA wrote:

- quote -

Let's assume that you're right, and the $2,000 isn't OID.
Assuming that this is a personal (non-business) loan, what
allows you to deduct it at all?

- quote -

The term "prepaid interest" only appears once in the IRC --
461(g). 461(g)(2) clearly states that the section doesn't
apply in this case. So again, if there's such a thing as
prepaid interest that isn't OID, what allows a homeowner to
deduct it?

--
================================================== ======================
Ian Pilcher i.pilcher[at]comcast.net
================================================== ======================

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Ed Zollars, CPA wrote:

- quote -

Denial of deduction for certain lobbying an political
expenditures? I'm going to assume that you mean 163(e).

- quote -

It does seem to say that. If that's the case, however, why
can mortgage points be deducted on a straight-line basis?
Everyone certainly seems to agree that that's allowed.

(It also seems to imply that points paid on a car loan, for
example, would be deductible in the year paid. I can't
imagine car dealers not taking advantage of this if it were
the case.)

- quote -

Neither does 461(g)(2).

--
================================================== ======================
Ian Pilcher i.pilcher[at]comcast.net
================================================== ======================

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Ian Pilcher <i.pilcher[at]comcast.net> wrote:

- quote -

Example 1: I go into a bank and say, "I wanna borrow
$100,000." The banker says, "We charge 2 points for a loan
like that." So, I hand the banker a check for $2,000 and he
hands me a check for $100,000. (Assume, for the sake of
discussion, that my $2,000 check was "good" irrespective of
whether I received the loan, <g> )

Is there any OID on that transaction? I think not because
the points were PAID FOR up front.

Example 2: Same scenario as above, except I say, "Whoa... I
can't afford to give you two big ones. Isn't there some
other way to work this out?" Banker says, "No sweat. We'll
write you a loan for $102,041, withhold the points off the
top, and give you a check for the $100,000 net amount." I
say, "Kewl!"

Is there OID in that case? I'd say yes because the points
were BORROWED rather than paid.

The distinction between the two examples is simply a
question of facts. Back to the case in question, the
original poster said that he PAID the points (although,
admittedly, perhaps he was not aware of the "technical" use
of that word in this context).

The OP definitely had "prepaid interest." However, I don't
think he had "OID." The concepts are NOT one and the same.

- quote -

But, let's not overlook the very next sentence of that
paragraph which reads, "However, if the points relate to
refinancing a home mortgage, see REFINANCING, later." The
"refinancing" section referred to says nothing about the OID
rule you mentioned.

While I fully concede that there is greater flexibility when
claiming "trade or business" deductions for interest or
costs of financing, I am not sure that such flexibility
extends to the area of (non-business) home mortgage
interest. In the home mortgage context, the rules seem to be
pretty cut and dried. I have yet to see anything
"authoritative" to indicate that you can choose to claim the
ENTIRE amount of points paid on a home mortgage refinance
during the year of payoff.

If you would like to debate this further, might I
respectfully request that we stop quoting the "Pubs" and
start quoting actual code or reg sections instead. <g
MTW

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Ian Pilcher wrote:
- quote -

I think it's time to get out of the publications (which, as
I've noted many times before, are *not* authoritative or
binding) and into the IRC (which is). Generally, the rules
for the deduction of OID are found at Section 162(e).

You are attempting to apply the OID rules to a mortgage.
There is a not so minor problem found at Section 1275(b)(2).
It provides that if you have personal use property
involved, you ignore Section 162(e) and deduct the expenses
on the cash basis. I would also note that Section 1275's
definition of personal use picks up anything not used in a
trade or business, and deal with both borrowing meant to
acquire *or* carry personal use property.

At that point, Section 461(g) grabs the points and it
governs their use from this point forward. So you have to
look at Section 461(g) and not the OID rules. That provides
that such amounts "shall be charged to capital account and
shall be treated as paid in the period to which so
allocable." Shall doesn't look like very elective language.

--
Ed Zollars, CPA
Phoenix, Arizona

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Michael T Wing CPA wrote:

- quote -

What do you think OID is? It's prepaid interest that
reduces the net proceeds of the loan. Read page 20 of
Publication 535.

- quote -

Read Publication 936 more carefully, about halfway down the
middle column of page 5:

Exception does not apply. If you do not qualify under
the exception, or choose not to deduct the full amount of
points in the year paid, see Points in chapter 5 of
Publication 535 for the rules on when and how much you
can deduct.

It should be noted, however, that the de minimis test in 535
is not valid for installment obligations, and I'm not sure
that OID on an ARM can ever be de minimis.

- quote -

If the points aren't prepaid interest (OID), why are they
deductible at all?

================================================== ======================
Ian Pilcher i.pilcher[at]comcast.net
================================================== ======================

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Ian Pilcher <i.pilcher[at]comcast.net> wrote:

- quote -

Hmmm... Actually, the OP stated that he PAID the points at
the time of the refinance. If that is correct, the points do
NOT represent OID. So, I think this comes down to whether
the points were "paid" or "borrowed."

I would also note that Publication 535 is entitled "Business
Expenses." Therefore, I would be cautious about projecting
its applicability to a (non-business) personal residence, as
in the case of the OP. For example, I don't see any mention
of your rule in Publication 936 "Home Mortgage Interest."

In the meantime, I would side with those who guess that the
points must be amortized over the life of the loan on an
"allowed or allowable" basis.

MTW

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

- quote -

You refinanced your house and are now bringing up the tax
treatment of OID instruments???

Is your legal theory that you purchased back your original
loan instrument at a discount???

If that's the theory, that works if you bought to open; but
what you have done in buying back your original loan
instrument is you bought to close and therefore you would
not be concerned about OID.

When you buy to open you would then own a (possibly
discounted) and if OID applies, you caclualate and pay it
and increase basis in your instrument.

But when you buy to close, as you do in the current
situation, you no longer own it, so there;'s no OID to
consider.

And the new loan is, we must assume, not discounted from
market, but is what the market will bear and OID never
enters the picture. Even if your mortgage was discounted,
it is not an investment instrument, but a personal loan on
your house that, under statute, can be deducted on Schedule
A if this is for a first or secoind home and is within
certain dollar limits.

My conclusion is that OID just doesn't the picture in
refinancing your personal home.

The advice you received about amortizing points on
refinances (except for loans with the same financial
institution, which you continue to amortize) would apply.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Phil Marti wrote:

- quote -


From IRS Publication 535, page 20:

If the OID is de minimus, you can choose one of the
following ways to figure the amount you can deduct
each year.

* On a constant-yield basis over the term of the loan.

* On a straight-line basis over the term of the loan.

* In proportion to stated interest payments.

* In its entirety at maturity of the loan.

You make this choice by deducting the OID in a manner
consistent with the method chosen on your timely filed
tax return for the tax year in which the loan is issued.

So the OP effectively chose to deduct all of the points at
the maturity of the first refinance loan. If the second
refinance loan is with another lender, he should be able to
deduct all of the points from the first loan in 2003.

--
================================================== ======================
Ian Pilcher i.pilcher[at]comcast.net
================================================== ======================

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

A.G. Kalman wrote:
- quote -

In the reply by Herb Smith, he pointed out that a refi with
the same lender prevents the t/p from deducting points from
the prior refi loan. They have to be amortized over the term
of the new loan. This is correct. My original post is only
correct if the refi is with a new lender.

However, the issue still remaining for a t/p who uses the
same lender, is how much of the points that were paid and
never deducted on the prior refi gets amortized over the
term of the new loan? Is it the full amount as no deduction
had been taken or is just the amount of unamortized points
as if the t/p had taken the deduction each year? I'm
guessing that the only way to obtain a full deduction is to
go back and amend the prior years for the amortized points
and then amortize the remainder over the term of the new
loan.

--
Alan
http://taxtopics.net

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

cazmn[at]msn.com (Chuck) writes:

- quote -

The fees aren't deductible.

The points on a refinance must be amortized over the life of
the loan. In order to deduct the portion applicable to
years prior to 2003 you'll have to amend those years'
returns. You can deduct all the remaining unamortized
points in 2003.

Phil Marti
Topeka, KS

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

cazmn[at]msn.com (Chuck) wrote:

- quote -

It depends. If you refinanced this second loan with the same
lender, you have to include the undeducted points with your
current loan and amortize over the length of the new loan.
Only if you refinanced with a DIFFERENT LENDER can you
deduct the remaining points in 2003.

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

Chuck wrote:

- quote -

The points must be amortized over the life of the loan. You
can only deduct the unamortized amount remaining on the loan
at payoff and the amortized amount for the months in 2003
prior to payoff. If you want the deduction for the amortized
amount for prior years you need to amend those tax years.

--
Alan
http://taxtopics.net

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->

I refinanced my primary home loan 2 years ago and paid
approximately $3,000 in points and loan origination fees.
In 2003, I refinanced a second time thus paying off the loan
which was refinanced 2 years ago.

My question is: can I deduct all points and loan origination
fees from the original refinanced loan this year because it
was paid off this year when I refinanced a second time. I
have not decucted any points or fees from the refinancing 2
years ago thus far even though I could have amortized it
over the life of the loan.

Thanks, Chuck

<< -------------------------------------------------> << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org > << ------------------------------------------------->