Client Testimonials

"Our experience with Rossi Doskocil and Finkelstein has been wonderful. It’s an extremely positive relationship. The team has been professional, understanding, and practical."

Jim Kato

Managing Partner

Kato & Assoc. LLC

"Rossi Doskocil & Finkelstein has been our CPA firm since we started the company in 2001. After spending time understanding our business, its challenges and opportunities and their ramifications from an accounting and tax standpoint, the firm and its partners have proven themselves to be very solid and trustworthy advisers."

Jerome C. Nathan

Chief Financial Officer

Centellax, Inc.

"RDF has provided timely, responsive and foremost, quality audit and tax compliance services throughout our relationship. I can readily recommend RDF for your audit, tax, accounting and consulting needs."

Andy Spooner

CFO

Columbia Holding Corp. & Subsidiary

"In my position of CFO for a Southern California based specialty retailer, we have utilized the services of RDF for over 7 years. They have provided outstanding audit, accounting, tax and consulting services throughout our association in a timely manner and at a fair price, while demonstrating a thorough grasp of our business."

Ryan Ciucki

Controller

Active Lifestyle Sports USA LLC

"As the CFO of an aerospace products manufacturer we have utilized the services of RDF for our audit, tax and accounting needs for over five (5) years. Foremost in our dealings with RDF is their responsiveness."

Mort Bauchman

CFO

Advanced Products Corp.

"As the CEO of M/Z Advertising, LLC, I have had the pleasure of dealing with RDF for over 20 years. They have served as our trusted business adviser for that entire period of time,"

Richard Zien

CEO

M/Z Advertising, LLC

"RDF has impressed us with their responsiveness, knowledge of complex nonprofit financial reporting issues, and with their knowledge of our organization and industry. Their staff has always been available to us when needed – to handle any request big or small. "

Gia Stokes

CFO

Habitat for Humanity, Greater LA

"We have established a great working relationship with RDF, and have been very pleased with the audit and tax services provided. The quality of work provided by the team is exceptional, timely, and professional. "

Lisa Vasey

Chief Administrative Officer

AIDS Research Alliance

Revisiting Your Home Mortgage Interest Deduction

A California home is a significant investment and often a principal component of a person’s net worth. Despite recent declines in the housing market, many homes in California are still quite expensive requiring large mortgages. For those who purchased their homes several years ago when prices were higher, they are likely to still have large mortgage balances. The home mortgage interest deduction is an important benefit for most people, particularly California homeowners.

As a result of the economic downturn, many may be drawing on a home equity line of credit (HELOC) to pay living costs due to diminished income. In addition, many refinance their home loans periodically to lower the monthly payment, reduce interest cost, or obtain cash. However, many may not be aware of the limitations on this deduction and that the tax agencies have targeted it for audit scrutiny. Below is a brief review of the tax rules for home mortgage interest as previously discussed in the February 2009 tax newsletter.

There are two components to the home mortgage interest deduction. First, taxpayers may deduct interest on “acquisition indebtedness,” which is interest paid on debt used to acquire, construct, or substantially improve a qualified residence and which is secured by that same residence. A qualified residence is a principal residence and only one other residence used by a taxpayer as a residence, e.g. vacation home. However, the aggregate amount of acquisition debt for which an interest deduction is allowed cannot exceed $1 million.

In addition a taxpayer may deduct interest on “home equity indebtedness,” which is debt that is secured by the residence and is not in excess of the fair market value of the residence after subtracting any acquisition debt. In addition, the aggregate amount of home equity debt for which an interest deduction may be claimed cannot exceed $100,000. The most common type of home equity debt is a HELOC. An additional nuance is that interest on home equity debt is not allowed in computing alternative minimum tax unless the proceeds of the debt were used to acquire, construct or substantially improve the residence securing the debt.

Interest on home mortgage debt that totals more than $1.1 million is considered by the Internal Revenue Service as personal interest and not deductible. For many Californians this debt limit may cause some interest paid on a home mortgage loan to not be deductible.

When a home loan is refinanced, the new loan is treated in the same manner as the old loan unless new borrowings exceed the old loan balances, i.e. cash is obtained, credit cards repaid, or other personal loans are repaid. When the new loan balance exceeds the old balance (other than for closing costs) interest allocable to the excess debt will not be deductible if the proceeds are used for personal purposes.

Not surprisingly the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) have targeted taxpayers claiming large home mortgage interest deductions for audit. The FTB has been particularly successful in auditing this item, which is of interest by itself since the home mortgage interest deduction does not appear directly on any California tax form. Apparently California has been selecting taxpayers for audit from e-filed returns since the Federal tax data (upon which the deduction appears) is incorporated into the state electronic file. However, it is likely that California has procedures in place to identify paper filed returns too. California has been successful in disallowing interest deductions on home mortgage debt in excess of $1.1 million.

Taxpayers who want to avoid audit or ensure deductibility of their home mortgage interest can do a number of things. Keeping good records showing that all home mortgage debt was used for acquiring, constructing or substantially improving one’s residence is a must. This especially applies to HELOCs due to their nature, e.g. series of borrowings and repayments. The easiest thing to do is to not have a mortgage balance in excess of $1.1 million. However, this may not always be an alternative or desirable. Taxpayers who will end up with home mortgages in excess of $1.1 million may consider purchasing, constructing or improving their residence with cash from other sources (investment liquidations or cash balances). Once the acquisition is complete a mortgage loan can be obtained to purchase or replace liquidated investments. This would cause the interest to be treated as business or investment interest expense (and generally deductible) instead of home mortgage interest. The result may vary depending on the facts and circumstances, but this may avoid the problems created by the $1.1 million debt ceiling. Although this strategy conforms to the letter of the law, it is not in line with the spirit of the law. As such, the IRS and FTB may consider disallowing the deduction or possibly changing the law to remove this loophole. If you are considering this approach, please give us a call to discuss the possible risks involved.

**************

RDF Tax Notes is published monthly for the clients, associates and friends of Rossi Doskocil & Finkelstein LLP. The information presented in this newsletter is intended as general information and may not apply in every case. We are available to consult with you to answer any questions you might have based on your specific facts and circumstances.