Other Tax Questions
Questions and comments on other topics covered in Fairmark.com, such as UTMA accounts, and any tax questions that don't fit our other categories.
Pledged Asset Line of Credit
Posted by: jlehrer, October 29, 2017 05:37PM
Client has a pledged asset line of credit. LOC is used to pay for construction of a new home but not acquisition as there is a separate acquisition mortgage.

Are the interest payments on the PALOC tax deductible, or do they contribute to the cost basis of the house, or neither, or both.

Thank you,

-J

Re: Pledged Asset Line of Credit
Posted by: Art, October 30, 2017 10:15PM
In order to have a Sch A deduction for mortgage interest, the loan must be secured by the home, and
usually registered with the local gov't.

That part of the mortgage used to buy, build or improve the home is called acquisition debt and the rest (subject to dollar limits) is home equity debt.


Even if you obtain a mortgage loan called home equity loan by the lender, it is still acquisition debt (subject to dollar limits). Other home debt not Acq or HEL debt is simply personal debt and not included on your tax return.

Re: Pledged Asset Line of Credit
Posted by: jlehrer, October 31, 2017 12:55AM
I am told that the interest on the loan which is not secured by the property but whose proceeds are being used to improve the property can be capitalized and increases the cost basis of the home. That sounds reasonable to me. If you borrow $10,000 to put in a new kitchen, and that loan costs you $11,000 including interest payments, does the costs basis of the home go up $10k or $11k.

Thank you,

-J

Re: Pledged Asset Line of Credit
Posted by: Art, October 31, 2017 03:26AM
That would be true if this was rental property or business property, but as described this is personal-use property.



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