Q:

Subject: HELOC Tax Deductible?

 

Would the interest on the HELOC be tax deductible if I pull equity (about $47K) from my primary home and use that money to pay down my rental property or investment property?

 

Thank you,

A:

There are a number of possible ways in which the interest on that loan could be deductible on your tax returns. 

For example, if you haven’t already exceeded the $100,000 limit on equity debt, the new interest could be claimed on Schedule A as personal residence mortgage interest.  It would not be deductible for AMT purposes.

Under the interest tracing concept, interest on any loan proceeds put into your rental properties could be deducted on the rental Schedule E.  This could yield a better tax savings than using Schedule A because it could reduce your AGI, which triggers a lot of other tax savings items.

Under the same interest tracing concept, loan proceeds put into investment property would enable the interest on that portion of the loan to be claimed on Schedule A as Investment Interest, subject to its annual deductible limits.

Your personal professional tax advisor should be able to help you deduct the interest in the most efficient manner.

Good luck.

Kerry Kerstetter

Q:

Subject: Residency Test?

TaxGuru,

Firstly, thanks so much for providing and maintaining your blog, I have learned much from it, as I’m sure countless other people have. Secondly, I was hoping you could help me with a question I have…

This year is the first time I will be filing taxes. I am from Memphis, TN and went to college in New York. I was a student in NY until I graduated in June of 2006, and then I was home (in Memphis) for three months, and then started my first job in NY in September until now. My license is from TN, and as far as I know my “official” address is in TN, but I work in NY, and I have bills coming to my apt in NY.

My question is as follows: Where am I resident of? Which state taxes do I file? What rules/tests does the IRS have regarding this?

Lastly, and on a different note (this one may be a little more difficult for you to answer), I wanted (well, my father wanted) to know since I was in school for a little bit more than half the year, can he claim me as a dependent? As far as I can tell, I pass the “qualifying child” tests. What would be the ramifications of this? And if he claims me as a dependant, am I required to file taxes? If not, should I anyway (I think im owed a refund.)

Thanks in advance for your time and effort!

All the best,

A:

You really need to be working with a professional tax preparer.

If you worked in NY, which it looks like you did, you will need to file a part year resident return with the State of NY.  While you may have a TN license, it sounds as if you have taken up official residency in NY.  NY is one of the most aggressive states in the country at establishing tax jurisdiction over anyone possibly connected to that state.  Working and living there makes you a taxable New Yorker and there’s no way you are going to escape that obligation.

You and your father need to do some number crunching to see if he paid for more than half of your living costs during the full year of 2006 in order to claim you as his dependent.  If he does that,. you will not be able to claim a personal exemption for yourself, which could cause you to owe some tax money.  Either way, you need to file both Federal and State tax returns.

Again, a professional tax advisor, who can look at the actual numbers (possibly your father’s tax preparer), can give better advice on how to handle your 2006 tax returns.

Good luck.

Kerry Kerstetter