Client Refinanced in 07 - Any schedule A items?

[miatax]

Hi Everone!

I am here trying to finish up too... I still have a few more to go and some extensions... I don't do many returns though, and for the 1st time I got a client who refinanced his mortgage 11/21/07 with new bank. I only have 1098 from old bank and the HUD closing statement for the refi.

Is there anything that is deductible on Schedule A from the refi statement? Let me know. Client has not given me anything from new lender.

Thanks.

Monica

[jklcpa]

If they paid points on the new loan, they'd be shown on page 2. They'd be amortizable over the life of the loan. But they prob didn't since you don't have a 1098. Also, you prob don't have a 1098 because their 1st pay't on the loan should be due 1/1/08.

[JohnH]

You might also want to check to see if there was a prior refi on the home.

If so, the unamortized points from that refi (if any) can be deducted in 2007.

[miatax]

No prior re-fi.. The only thing I see on page 2 is interest from 11/27/07 to 12/01/07 was $87.40. Total settlement charges were $8,634 of which $1,938 was to be paid by my client less $362.50 that was a refund for 'loan discount' from the new lender. So, net my client had to pay $1,575.

I don't think any of the settlement charges that are clearly stated line items from the closing statement are deductible but let me know if I am missing something.

Thanks for the feedback.

[miatax]

I do see intangible tax - mortgage $290.. could this be deducted? What part do I considered paid or added on to the mortgage?

[Ray in Ohio]

You might also want to check to see if there was a prior refi on the home.

If so, the unamortized points from that refi (if any) can be deducted in 2007.

Are you saying the balance of the unamortized points would be deductable in 2007? If so I never realized that, but it makes sense.

(don't know that I've ever come across that yet, but I wouldn't have known if I did)

[JRS]

JohnH is right. Unamortized points are deductable from first refi or mortgage are deductable in the year of the new refi.

[JohnH]

In terms of current benefit, the unamortized points from a prior refi yield a much larger deduction than the current-year amortization on a new refi. I think it's one of the most commonly-missed deductions by the chains and it is almost always lost when a client moves from one preparer to another, unless the new preparer asks about it.

However, there is a little trap when the borrower uses the same lender. If the refi is with the same lender, the unamortized points cannot be deducted in full - they must be folded into the points on the new refi.

Almost everybody has unamortized points when they refi or sell a home, unless they never did a refi the entire time they owned it, or else if they did a refi during the ownership period but didn't pay any fees based on the loan amount. (points, origination fee, yield spread premium, loan discount, etc). The broker industry has come up with lots of interesting names over the years to confuse the borrower, but if they're based on the loan balance they probably qualify as points.

[GLJEANNE]

The broker industry has come up with lots of interesting names over the years to confuse the borrower, but if they're based on the loan balance they probably qualify as points.

Ain't that the truth! How many times have you heard TPs proudly say, "Oh no, I didn't have to pay any points for this," only to find it on their HUD statement?!

[JohnH]

I had this conversation with a client last week. He was asking whether he should sign a 4506 in conjunction with a refi, and I made the mistake of asking the loan details. He's paying over $5K in total expenses to refi a $180K loan, with about $3K being points. All for a 1/2% drop in the rate.

I told him he's signing up for a 5-year payback on the refi, even allowing for the tax effects. When he didn't understand this, I explained how he needs to divide the actual interest savings into the transaction costs to approximate his payback period, and he said "Oh, I don't have any transaction costs - they're just adding the fees to the loan balance." And he's an educated guy & an otherwise good businessman.

[miatax]

I don't see anything on the hud statement except intangible tax paid on mortgage. Dumb question, but I guess is this deductible as another tax on schedule A?

[miatax]

Also, please let me know exactly what 'points' covers if its not directly stated on 2nd page... Is this all settlement charges? What does it or doesn't it include? I've seen this deducted as a misc 2% itemized deduction in the past on other returns,but I don't think that was correct at all. Also, if part of the total was tagged on to the financing what part is deductible if a part was actually paid in 2007.

Monica

[JohnH]

The problem with points is that they are not always called "points" because lenders & brokers are very creative. They have many names, but they share a common purpose - they are charges assessed as a percentage of the loan in oder to obtain the loan. That's the main hurdle to overcome.

There are a half-dozen or so other things to check off, including whether they are a common business practice in the local area, they are not excessive, they are clearly shown on the settlement statement, etc. They are usually found in the "800" section on page 2 of the standard HUD-1 settlement statement (but not all charges in this section are points). On a refi, they may appear on the front of a single page rather than on a standard HUD-1 form.

Sometimes it takes a little study of the documents, but in the end the client comes out way ahead even after paying for your time. My practice is to always insist on seeing the HUD-1 or closing statement on any new home purchase or refi in order to determine for myself whether the client has any sort of deduction. I don't rely on the 1098 to provide this info.