How often have you advised a client who is able to pay cash to eschew a mortgage just to "get the deal done"? After all, she's an excellent credit risk...she can refinance her home later and still enjoy the tax benefits...right?
WRONG! You may not only be offering erroneous advice to your client, you may be setting them up for an IRS audit- and they are going to be peeved at you when they find out the truth about the deductibility of mortgage interest. Sticking your head in the sand and claiming that they "should have checked with a tax adviser; I'm just a Realtor!" ain't gonna cut it next year.
The IRS is gonna get your clients next year and they just may come running to you. What will you tell them?
Next year is important because the IRS, in its typical Big Brother fashion, has enlisted lenders' help to crack-down on one of the most abused tax deductions to date; mortgage interest.
Some things EVERY Realtor should know about the mortgage interest deduction
Brian, thank you so much what a fascinating article, and great advice us all to know about, I sure didn't I think I'll take it to my meeting tomorrow morning and share it with the other realtors in my office.
Hey Brian,
Thanks for sharing the info. I doubt that many know about the $100,000 limit, truthfully I was surprised the first time I read that one myself. I've know many who have re-fied (far in excess of the $100,000 cash out) to reinvest the past few years. People have always assumed they could deduct everything.
Brian.... just came back from your blog. This is more than an excellent post, but it should open the eyes of those that give this kind of advice. As I just told a client yesterday, I am not a lawyer and that is a question for a lawyer. Just as this is for an accountant. Great job.
The tone of this post is a bit sensational; it's designed to capture eyeballs. I knew about the $100,000 home equity exclusion but NOT the IRS crack-down next year.
So...for Realtors who didn't know about the IRS crack-down, you're not alone. Now, we all know.
Brian - Thanks for taking the high road and encouraging real estate agents to do the same. As Jeff so aptly noted, we are not accountants and cannot dispense tax advice, but we sure can suggest that our clents consult their CPA's and giving them the questions to ask. To do anything less would be irresponsible and breaching our fiduciary responsibility. Great Post.
Marlene Bridges,REALTOR®
Certified Residetnia Specialist®
Seniors Real Estate Specialist®
Orange County, California
Brian,
The prolmem with bloging is that this piece gets the same type size and placement as the most frivolous piece of fluff!
This should be mandatory reading.
Well done.
Bill
William J Archambault Jr
The Real Estate Investment Institute
http://www.reii.org
PS: I disagree with Jeff. He's right about referring them to the attorney and/or account, but we should supply the questions and know when the answers are wrong.
Good info. Not the info as much as the warning to agent NOT to give tax advice.
Another one I've been waiting for the IRS to work on is the amount of tax deducted each year by many home owners for real estate taxes paid. They usually deduct the full amount of their tax bill which would include things like "trash removal" in some communities and "front foot benefit" charges which are NOT deductible.
The amount on a per person basis isn't so much, but "times 30-40 Million" it would come to a LOT of money.
Maybe it's too complicated for the IRS.
Brian, can you answer this ? What if I have a client who pays cash, due to the verification doc's needed to get a loan are in transaction from another country. The pay cash for the house now, and plan on re-financing in a few months to pull cash out. They were going to put down 150K and now decided to just pay the 355 up front to purchase.
Are you saying ?and the article you sent us to read ? that they can only take out 100K and not more than that?
Brain
A very interesting Blog. I didn't mind going to your site to finish it either.
Brian,
I know I can be critical with LO's in your business because I have experienced very bad lenders on deals brought to me by other Realtors. In 11 rs I have had only 2 deals die due to lack of information and follow up on the other side. And would you believe it...just happened this year because the other Realtor was wearing the 2 hats. I have the listing but seems that the other side likes to make up stories. Anyway I might not have a great taste on my mouth with some...not all but I would always recommend the client speak to someone in your profession...I would never make my own recommendation just as you in your business would not get involved in something that was not your expertise. It is not my place to recommend advice in your field..don't want the liability. Although..CASH IS KING if you have enough. I made a great deal on my house so I cannot complain.
HEY BRIAN
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At first I was reading the article going "where's the beef?" there was nothing specific, but then I clicked on the link to presumably your blog and found some great stuff. Not too worried about it here in the south as there are few cash buyers and fewer homes over 1 million, but good stuff none the less.
Thanks!
Brian, This time I resisted clicking over for a few minutes until I read all of the good comments. I had to click over to read the rest of the story. I liked the information but I still didn't like clicking over. My first thought when I see a post by you is not that it's something I need to read, but it's something I'm going to have to click over to finish reading. Small point but it is what it is.
Great point though. I've always been uncertain about those rules. I need to study up on it. I think that this is just another reason that they need to abolish the current tax system. Why do they make it so confusing? I'm pretty smart and it makes my head spin.
This very subject came up yesterday with a client. They intended to acquire the property with a line of credit and then refinance into perm later.
I directed them to their CPA.... I hope he gets it right.
Thanks for the advice Brian, I have never recommend any financial advice to a client...nor would I even want to open that can of worms.
Missy Caulk:
That's a great question. They have 90 days after the close of escrow to CLOSE the refinance transaction or the Acquisition Indebtedness gets sets to zero; then they can only deduct the $100,000 for the home equity indebtedness.
They may consider a no doc loan for the 70% loan amount with a hiked up rate to cover closing costs. It sounds like the assets can be documented so you just need a no doc or no ratio loan to get them the loan. If you need me to discuss this with their CPA, I'm glad to help.
I hear this ALL THE TIME!! The Boca Raton Market has many $1M+ homes with plenty of people wanting to buy all cash... agents are saying it makes the transaction easier.
I just don't understand why more agents aren't getting burned for giving tax advice which is well outside of licensure!
I had no idea there was any IRS limit tied to the initial acquisition indebtedness.
As usual, this is very useful information. Thanks Brian.Interesting Brian. I refinanced this year and my lender said nothing about it. The sad thing is I refinanced to get the house remodeled instead of doing a home improvement loan. Is it deductable with that in mind?
Brian,
Thanks for the heads up. Fortunately, I have not come across this situation (cash borrower wanting to refi), but knowing the IRS will be cracking down on interest deductions for over $100,000 aquisition price is definitely an eye opener.
Chris et al,
There are different rules if you remodel or use the proceeds for investment purposes.
Chris, if you have only financed $100,000 more than your original loans, you're okay. if you have receipts from the work you did, and the work was done less than 90 days of the refinanced loan closing, you MAY be okay.. You've got to check with a CPA.
Thanks for the heads-up, Brian!
- Tchaka
Congrats on the featured post. Seems that the world is full of advise and most of it is either wrong or needs qualified for an individual to utilize. In our industry we see well meaning people giving totally erroneous advise. Best to advise any Buyer or seller seek out professional advise when their questions need qualified.
All the Best!
William- new site launched, take a look
Brian,
The more comments you collect on this post the more upset I'm getting!
I'm not a lawyer, not a CPA, not even an MBA. just a banker. turned REALTOR®, turned mortgager broker, turned consultant. I don't know all the answers, but I've made it my business to learn most of the questions. How can other wise good to great real estate professionals take the position that "It's not my job"? Mortgage people know more about the client financially than anyone. The REALTOR®, good ones anyway come in a close second. When was the last time an attorney or CPA ask to see a clients credit report and/or 1003? A good one may ask for the O & A. We're the only one who regularly sees everything. Just what is our job? The on-line order takers can get most people some kind of loan, the para-legal can fill in an O & A ($50 at the coroner legal forms store), what do we do for the big money? I've been under the impression that we got paid well for our experience and advice.
We have to walk a thin line. We have to stay within the parameters of our E & O insurance, but there is no regulation against referring clients to attorneys and CPA and providing the questions!
I once was called in to help with a huge short sale, I completed the transaction and saved the client $3,000,000.00 in taxes on the $8,000,000.00 short sale. Their attorney and CPA told the client they didn't think of "that" didn't think of over $3,000,000.00 in immediate taxes. Ya, right. Big deals are rare, but little ones come up all the time. I've always believe real estate was so much more that asking "don't you just love the family room?"
It's no wonder we have such a public relations problem with the sub-prime problem, Obviously it was no one's job to tell the clients that adjustable rate loans that start at the lowest point in history age going to go up! God forbid anyone helping the client. At least don't say anything that can get in the way of a quick closing.
On the other hand, it's comforting that so many are concerned!
Bill
Forgive me for commenting on both sites, but as you know I love redundancy!
Bill,
I appreciate the redundancy and am grateful that you comment on my "outside" weblogs. Especially the new one with the mission to educate the conumer about how to REALLY integrate a mortgage into a financial plan. I continue:
I'm going to agree with you concluding comment. I have been spending a lot of time on education these past few months. In fact, I'm studying for my Certified Financial Planner designation at SDSU, now.
Why? I really want the edge. We are often the first contact the average Joe has with financial services and are de facto financial planners whether we like it or not.
The advise we're giving is often "safe" but, as Robert Ashby points out, I think we owe it to our clients to keep them from the "hangman's noose".
I want us to do better. I want us to know more. I want us to force the consumers to think good and hard about these ideas. Ten years ago, the words "1031 exchange" didn't exist in the average Realtor or originator's vocabulary. Today, the butcher has completed two exchanges.
Let's take solace in your concluding comment and be the catalyst for positive change in our industry.
I must have typed six answers and erased them all. Let me just try to not get carried away. I need to know how to broker...meaning getting all documents in the correct form and at the correct time, to where they need to be. I have a series of questions I ask lenders (some of them courtesy of Mr. Brady I might add) so that I know a client is really pre approved or that my sellers have a buyer with a solid pre approval. But my real job as far as the financial end of it is to make sure my client, buyer or seller, gets all the finanical advice from an expert they need to make the transition or sale. Otherwise why do we need mortgage brokers, I can just do it all and make your commission too? See, no matter how I type this or how many times I edit, it's still snarky. I guess I will hit send lol
It works for me.
Tell us more about this new web when you can,
I didn't learn about 1031's until 74 or 75. The REALTORS I hung out with could explain them, it depends on who you hang out with.
I too liked what Robert had to say, the more of his post I read the more I'm impressed with him! I didn't mention him simply because there are some other really good people commenting on this blog and I can't mention them all. Even those, here that don't "get it" but are concerned engouh to get involved are pretty good people, wrong but good people.
Bill
Snarky? Good word! I agree with you, Carole...to a point. Robert Ashby says it best on the through post (over at World Wide Wealth Planners).
Robert Said:
I also believe that as trusted advisors, we mortgage professionals should know the tax codes as it applies to mortgages and not rely solely on the disclaimers. Most likely, borrowers will not take the time to seek tax advice, so we could potentially save them from the hangman's noose.
Mortgage Planners can help you offer the right questions for your client and help you increase your professional advice offering. After all, it IS a team effort. I hope this post encourages you to pick the right team member in Cleveland (or to encourage your existing team member to hone their skills).
To all:
This post is about MY industry and then the real estate brokerage community. I've heard everyone suggest that we need better mortgage reps; we do. My objective on Active Rain is, and always has been, to educate you, the professional Realtor, about how mortgage salespeople are not ALL equal. I'm not talking about "best rates and fees" or "convenience of the ABA in your office". I'm talking about world-class advice. The kind of advice that makes your clients wealthy.
It's not about the deal...it's about the ten transactions you do for those clients, within a carefully crafted plan, that help them educate their children and retire comfortably.
We are ALL going to do better moving forward.
I don't give tax advice but I like to be as knowlegeable and informed as possible. I was actually given conflicting advice from two different tax attorney's when I sold my place.
In Manhattan we have many ALL CASH buyers I think it is about 50% of all transactions. As listing brokers cash is always King. Sellers are usually advised to take a cash deal if there are 2 offers at the same sale price.
However, while not known to many agents coops actually prefer the buyer to have some financing. They prefer that the buyer does not use all their cash up to buy the apartment they rather have them have liquid assets left after the close to cover assesments, maintenance increases or just for a rainy day.
The other reason is if there is no mortgage on the property it difficult for the coop to collect maintenance in arrears. When there is a coop loan (technically it's not a mortgage) the lender gives the coop first lien so the coop is more protected to get their maintenance.
Sorry, I forgot to comment over here as well. Here are my two comments on the other site...
#1 - Excellent advice. The only thing I would add is there may be some confusion in the $1.1 Million dollar limitation. That limitation is combined between Acquisition Indebtedness ($1.0MM limit) and Home Equity Indebtedness ($100,000 limit).
I also believe thta as trusted advisors, we mortgage professionals should know the tax codes as it applies to mortgages and not rely solely on the disclaimers. Most likely, borrowers will not take the time to seek tax advice, so we could potentially save them from the hangman's noose.
#2 - OK, I am not a tax professional and any advice I give should be be researched with one who is to ensure it applies to you specifically.
Still, I read tax code (yes, as crappy as it is written, I actually read it). Why? To be a better advisor for my clients.
Regarding increasing acquisition indebtedness. Yes, home improvements can be used to increase it, subject to documentation and can be as long as 24 months prior. Divorce settlements can also be used to increase it. Again documents are needed.
Heck, you can even exceed the $1.1MM limitation, but it has to be done correctly and documented. Make to much money to qualify for mortgage interest deduction, no problem, you may still be able to deduct it through documentation.
In case you are not getting the picture, you need to seek an advisor who can help your specific situation. I know people who have even been told by CPAs and others that just go ahead and deduct all interest as the IRS won't go after you anyways. I HAVE WARNED PEOPLE ABOUT THIS TOPIC FOR YEARS, now the IRS is going to start enforcing it and guess what, millions of Americans are going to lose a lot of money because they didn't follow the law.
Keep the work orders, Chris!
Partner up with a lender who knows what she/he is doing!