In some instances, a senior client will opt to refinance (or “finance,” if there is no mortgage on the property at the time) a principal residence to raise cash. There are obviously practical problem if the senior client is not working and income is limited, especially in the current mortgage/real estate environment. While there are potentially significant tax problems with this type of transaction (it won’t qualify as “acquisition indebtedness”), the biggest difficulty will likely be meeting a lender’s requirements if the client is not employed on a sufficiently full-time or regular basis. These issues are likely to be more acute, if not insurmountable, following the sub-prime crises. Assuming this hurdle is met, clients will wish to know the tax consequences of the transaction. If a home mortgage is refinanced, only an amount up to the remaining principal balance on the loan refinanced can qualify for tax deduction. For most seniors, other than interest on a $100,000 home equity line, this will mean no tax deduction when they take out a mortgage on a house that has been paid for and the proceeds are not used for improvements.This is often a surprising negative tax result that clients may not anticipate, and which they may question as to accuracy. The general rules are explained elsewhere on this website.
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