Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 1, 1993 TAG: 9302260053
SECTION: BUSINESS PAGE: A-8 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
POINTS CAN BE DEDUCTED OVER LIFE OF REFINANCED LOAN
EDITOR'S NOTE: The Roanoke chapter of the Virginia Society of Certified Public Accountants will answer tax-related questions from our readers in a special feature on the Monday Money Page. Send them in writing to Tax Questions, in care of Mag Poff, Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010.Q: I recently refinanced my mortgage of $103,000 from 30 years at 9.8 percent to 15 years at 7 percent. Can I deduct the 3 1/2 points paid on the refinancing of the existing mortgage? A portion of the points were to buy down the interest rate since we could have paid less points for a higher fixed rate. If the points cannot be deducted outright, please detail the calculations in determining the deductible portion.
A: For a mortgage, the term "points" means interest paid in advance. Although the statement that you will receive from the lender showing the portion that is allocable to points may not list the total amount that you paid; the additional amount that you paid to buy down the interest rate falls under this definition when addressing the deductibility of points paid on refinancing.
The points you have paid to refinance your mortgage are not deductible in full in the year that they are paid. However, you can deduct these points ratably over the life of the loan (in your case, 15 years). You would do this by taking the total points of $3,605 divided by 180 months (15 years) multiplied by the number of payments you made during the year. In an ordinary year where you make 12 payments, your computation would be: $3,605 divided by 180 months multiplied by 12 payments equals $240.
Answered by Patrick Budd of Budd, Ammen & Co.
Q: During the first three months of 1992, I owned a commercial horse farm from which I did not receive any income. However, I had a loss of $1,600. Should I show this loss on Schedule C or Schedule F?
Also, I sold two commercial properties for which I am required to complete Form 4797. May I combine both sales on one form, or must I use a different Form 4797 for each property sold?
A: Farm income and losses are reported on Schedule F. However, the taxpayer should understand that these kinds of losses are scrutinized by the IRS. In order to claim a loss from a farm or business, the taxpayer must be able to show that he or she entered into the venture with the expectation of making a profit and conducted the activity in a businesslike manner.
Otherwise you risk having the venture declared a "hobby loss," and you will be able to deduct expenses only up to the amount of income. If you fail to show a profit in any three out of five consecutive years, the IRS will presume that your activity is a hobby.
Regarding the second question, both properties that were sold can be reported on one Form 4797. Report each property on a separate line of the form.
Answered by Melinda Chitwood of Brown, Edwards & Co.
Q: In July 1985, I purchased a Virginia Education Loan Authority Bond (tax free) that paid 9.4 percent. Because of the high interest rate, I paid $5,384.45 for a $5,000 bond. This bond was "called" in November 1992. I received $5,050. Since this was a "tax free bond," I wonder if I can claim the $334.45 loss as a deduction on my state and federal income tax.
A: For a bond that yields tax-exempt interest, any premium that is paid to buy the bond must be amortized from the date of acquisition to the date of maturity (or earlier call date). The difference between the call price and the face value is a reduction of the premium. As the premium is amortized, it reduces the original cost to determine the basis for computing any gain or loss.
In this case, because the bond was held until it was called, the premium would be fully amortized, and there is no gain or loss. The disposition of this bond should be reported on Schedule D of your return.
Answered by Reid W. Ammen of Budd, Ammen & Co.
Q: My ex-spouse and I purchased a home in 1968 for $16,000. In 1971, we purchased 160 acres for $16,000. Both properties are paid in full.
We separated in 1984 with a legal agreement that if the separation became permanent, we would make this agreement part of the divorce agreement. I kept the home because children were involved. This separation became a divorce in 1985.
In 1990 I changed to a job that was not within driving distance of that home, which I put up for sale. Later that same year I bought another home in partnership and moved there.
I only recently sold the first home for $58,000.
Where does the basis begin on the first home? Would it benefit me to buy out the partner? I plan to pay my part of the partnership in full from the proceeds of the sale.
A: Your tax basis begins in 1968 and would be $16,000. This assumes that, in your divorce, when you say "exchange" you mean "property settlement." That is, you retained the house purchased in 1968 and your ex-spouse retained the 160 acres purchased in 1971. Buying out your partner would increase the basis of your interest in that property. Other benefits you receive will depend on the use of the property.
Answered by Kenneth Prickitt of Young & Prickitt.
Q: An IRS publication for 1991 said reporting rules on "Tigr" [a kind of stripped zero coupon bond] would change for 1992, and the holder is supposed to get actual figures to show on returns for 1992 and after.
I received a 1099-OID [Original Issue Discount] from a New York bank which shows only $4 more than the 1991 form. For 1992, is my 1099-OID amount the correct amount to show on my 1040 Schedule B?
I've been recomputing my OID based on my yield of 11\ percent for each year since 1985 when I acquired it. The stated interest shown on my Tigr is 11 7/8 percent, not my 11\ percent yield, and it shows maturity in the year 2003 rather than 2000. Do I continue recomputing as usual? The recomputed amount would be about $200 more.
How does the bank arrive at the OID on the 1099, and what dates does it cover? The 1099 does show that holders may have to recompute the OID. How does this comply with the IRS ruling?
I also purchased a collateralized mortgage obligation below par. The only examples in IRS publications 1212 and 550 are based on the "de minimus" amount and a regular bond with principal due at maturity. CMOs will be paid back before maturity. My Fannie Mae shows a 30-year term and average life of 10.8 years. The stated rate is 8 percent, basis is 8.084 percent and yield is 8\ percent. Is this an IRS "CDO"? How do I figure what I owe the IRS and where do I show this on Form 1040?
A: In connection with your Tigr, in most cases, unless you purchased a debt instrument on its original issue date at its original issue price, you may have to recalculate the applicable amount of OID to report on Schedule B. The amount reported on your 1099-OID is not necessarily the amount you should report.
Elimination of semi-annual record date reporting in 1992 does not change this requirement. Pre-1992 filers of 1099-OID were only required to issue the forms to holders of debt instruments as of a semi-annual reporting date, as though the holder had held the debt for the entire period it was outstanding.
That is, if the applicable semi-annual reporting date was June 1 and you purchased a debt instrument June 15, you would not have to be issued a 1099-OID for that year. Also, if the debt was issued Jan. 1 and you purchased it March 1, the amount reported to you would be computed as though you had held the debt for the entire year, not just for the portion of time you held it.
In 1992, all record holders should receive a 1099-OID regardless of their purchase date, and the amount should reflect the portion of time they held the debt.
This rule should not affect you if you purchased your investment in a year prior to 1992.
If you were required to recompute your OID in prior year, then you should continue to do so for 1992, based upon your yield to maturity. The original issue discount should be computed using your acquisition price and date, not the original price and date.
Detailed rules for figuring OID on stripped bonds and stripped coupons, including zero coupon instruments backed by U.S. Treasury securities (i.e. Tigrs) can be found in IRS publication 1212, which you are apparently using. You also appear to be aware that the rules vary based on the date you purchased the debt instrument.
As to the second question, based on the facts presented in your letter and our phone conversation, it appears that you purchased a regular interest in a Real Estate Mortgage Investment Conduit or REMIC, not a collateralized debt obligation. Your broker should have provided you with this information.
A REMIC is treated as a debt instrument for income tax purposes. Therefore, the OID, market discount and other reporting rules related to debt instruments also apply to your "Fannie Mae."
You apparently purchased a REMIC with an original issue discount at a market discount. Based on the numbers you quoted, the "de minimis rule" does apply and, therefore, you may disregard both the OID and market discount as they are less than one-fourth of one percent of the stated redemption price times the number of full years from the date of original issue to maturity. This rule does apply to REMICs as well as to regular bonds.
The stated redemption price at maturity to use in the calculation is the amount of principal payments which you are guaranteed to receive.
On this particular investment, the only income you will pay tax on will be the actual interest accrued to you for the period you held the regular interest.
This is slightly different from most investments in that even though you are a cash basis taxpayer, you will pay tax on any interest accrued to you even though it may not have been paid to you by the end of the year.
The amount of interest to report on Schedule B (carried forward to line 8A) should be provided to you by the broker. The broker should also provide you with an additional statement mailed by March 15.