There May Be More Equity Debt than Meets the Eye

For both regular tax and AMT computations, interest paid on a debt to acquire or substantially improve a first or second home is deductible as long as it does not exceed the debt limit (generally $1 million). This is also true of refinanced debt, except that any increase in debt is treated as equity debt. For regular tax purposes, the interest on up to $100,000 of equity debt on the first two homes can also be deducted.

However, equity debt is not deductible when computing the AMT, nor is acquisition debt that is used to purchase what the instructions for the AMT form 6251 refer to as a “nonconventional home.”

A nonconventional home is a home that is used on a transient basis, such as a motor home or boat. The interest, if otherwise qualifying for the home mortgage interest, is only deductible on Schedule A and is not deductible against the AMT. Code Sec 56(e)(2) and the instructions for Form 6251 define a qualified dwelling for purposes of the AMT as any house, apartment, condominium or mobile home not used on a transient basis.

Taxpayers should exercise caution when incurring home equity debt. Generally, loan brokers are not aware of these limitations, and there are numerous pitfalls.

October 12, 2016 by Lee Reams Sr.
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