Amortization of home mortgage points.Sec. 461(g)(1) requires a cash-method taxpayer to capitalize and amortize prepaid interest Prepaid interest An asset account showing interest that has been paid in advance, which is expensed and charged to the borrower's P & L statement. prepaid interest . However, Sec. 461 (g)(2) provides that this does not apply to points paid on debt incurred to purchase or improve the taxpayer's principal residence (if specified conditions are met). The General Explanation of the Tax Reform Act of 1976, p. 102, explains this legislation, in part, as follows: The Act permits points paid by a cash method taxpayer on an indebtedness incurred in connection with the purchase or improvement of (and secured by) his principal residence to be treated as paid in the taxable year Taxable year The 12-month period an individual uses to report income for income tax purposes. For most individuals, their tax year is the calendar year. of actual payment. (Emphasis added.) In Letter Ruling 9905033, a husband and wife, cash-method taxpayers, acquired a principal residence and obtained a mortgage to finance it late in Year 1. The taxpayers paid 1.25 points to the mortgage lender. Their Year 1 itemized deductions, including these points, were less than their Year 1 standard deduction The name given to a fixed amount of money that may be subtracted from the adjusted gross income of a taxpayer who does not itemize certain living expenses for Income Tax purposes. . Accordingly, the taxpayers wanted to claim the standard deduction for Year 1 and amortize the points over the loan's life beginning in Year 2. The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. found that Sec. 461(g)'s legislative history indicated congressional intent to permit (but not require) taxpayers to currently deduct points on their home acquisition debt. The Service reasoned that this intent was corroborated cor·rob·o·rate tr.v. cor·rob·o·rat·ed, cor·rob·o·rat·ing, cor·rob·o·rates To strengthen or support with other evidence; make more certain. See Synonyms at confirm. by Sec. 461(g)'s structure; Sec. 461(g)(2) merely provides that the general requirement to amortize prepaid interest does not apply to points paid on qualifying debt incurred to purchase or improve a principal residence. Therefore, Sec. 461(g)(2) did not mandate the current deduction of such points and, correspondingly, does not prohibit a taxpayer from adopting the general rule. The letter ruling allowed the taxpayers to amortize the points paid in Year 1 over the loan's remaining life, beginning in Year 2. Apparently, the taxpayers will be able to claim itemized deductions after Year 1 because of property taxes and interest payments attributable to the new residence. FROM STUART Stuart, British royal family Stuart or Stewart, royal family that ruled Scotland and England. The Stuart lineage began in a family of hereditary stewards of Scotland, the earliest of whom was Walter (d. R. JOSEPHS, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , TAX ASSISTANCE PRACTICE (TAP), SAN DIEGO, CA |
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