LoanCentral's Real Estate Lending Blog

Did You Get Your Tax Deduction???

You don't know what you don't know", a saying popularized by Douglas Andrew of Missed Fortune fame says a lot. It is especially important with the tax professional-client relationship. If the client does not offer the information, the tax professional does not know to include the information in plans and if the tax professional doesn't know what the client's plans are he (or she) cannot help with the planning.

Specifically I am writing about the tax deduction for deferred interest in a paid-off Option ARM mortgage. This happens when the client pays less than the interest-only payment and the difference is added to the balance owed. I have been told by tax experts that this deferred interest is tax deductible when paid off on a refinance or a sale of the home. Obviously every situation is different and you should always speak to your tax professional to its applicability to your situation.

If the client does not tell the tax professional that the home has been sold or refinanced, the financing tool used was an Option ARM - AND the client made less than the interest only payment the tax deduction might be missed. A scenario that I ran recently for a client was that his $300,000 loan at 7.5% for 30 years with a minimum payment of 1.25%. The difference between the interest only payment and the minimum payment over 36 months was $31,508. This makes for a potential healthy lump sum interest deduction for the client if the tax professional only knew. The tax advisor is your friend - give them the tools that they need to help you. For more information on LoanCentral's "Tax Deduction" paper - click here.