KASS: New mortgage loan disclosures in effect

NOTE TO READERS: As of Oct. 3, there were major changes in the way mortgage loans are handled and in the information which potential borrowers are given. The Consumer Financial Protection Bureau has significantly revamped the various disclosures that lenders have to provide to their customers. In future columns, I will address those new rules, and definitely welcome email questions.

However, there is one interesting aspect of these new rules. There is new terminology:

* “Lender” is now “creditor”

* “Borrower/Buyer” is now “Consumer”

* Initial Truth in Lending (TIL) and Good Faith Estimate (GFE) is now “Loan Estimate”

* “Final TIL” and “HUD-1” is now “Closing Disclosure”

I will try to use the new ones, but I am a creature of habit. Accordingly, if I accidentally revert to the old ones, please let me know.

DEAR BENNY: Our 2014 tax returns have now been filed, and we are starting to plan for the 2015 return. We sold our old house this past July and purchased another in August. We made a lot of money on the sale. I remember my parents talking about something called “the rollover.” Does that still apply? – Meg

DEAR MEG: No, the rollover was eliminated in l997, but substituted with a much better deal for home sellers. If you have lived in and owned your house for two out of the five years before it was sold, you can exclude up to $500,000 of profit if you file a joint return, or up to $225,000 if you file a single tax return. This is known as the “ownership and use” test. For more information, there is a free IRS Publication, No. 523, titled  “Selling Your Home.” You can download it from www.irs.gov/publications.

For a comprehensive – but readable – explanation of many of the laws involving real estate, I highly suggest “Julian Block’s Home Seller’s Guide to Tax Savings: A Tax Guide for Buyers, Sellers, Foreclosures, Short Sales, and More.” It can be purchased directly from the author’s website, www.julianblocktaxexpert.com.

According to the Wall Street Journal, the book “provides more depth than most other books.”

A FOLLOW UP ON MORTGAGE INTEREST DEDUCTIONS: As my readers know from reading my columns, if you own a house with a mortgage, you can deduct interest on up to $1 million of your loan plus up to an additional $100,000 if you have a HELOC. Married couples filing separately are limited to interest paid on up to $500,000, and also up to $50,000 on HELOC interest.

But how is this handled when two unmarried persons jointly own their house? According to a recent 9th Circuit Court of Appeals decision, each co-owner has the right to claim the full interest deductions up to the $1 million and the $100,000 HELOC interest.

Charles Sophy and Bruce Voss own two houses in California, with mortgages (including a HELOC) totaling, at the time of the court case, approximately $2.7 million. Both owners are jointly and are severally liable for the repayment of all of the loans. They each filed a separate tax return, and each claimed the maximum deduction – namely on up to $1 million.

The IRS – and the Tax Court – disagreed, holding that they could only claim half of the deductions.

But on Aug. 7, the 9^th Circuit reversed the tax court, holding that the mortgage interest limit applies not to the amount of the total loan, but applies per taxpayer. Accordingly, both Voss and Sophy were entitled to deduct the full amount, which was approximately $180,000 per year.

Not bad! Of course, not everyone can afford million-dollar houses. However, the court decision (which is limited to nine western states and two Pacific islands) is still applicable for unmarried persons who are co-owners on residential real estate.

Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: [email protected].