How do I handle the sale of a home equity financed vacant lot on which I intended to build?

by Jim

(Waukesha, WI, USA)

We purchased a lot in December 2007 with the intention of building within 8 months. We paid cash, but financed it with a HELOC of over $110,000. No payments were made in 2007.

We were unable to sell our home, so we did not build in 2008. We wrote off all the interest on the HELOC on our 2008 taxes. I recently read something about a $100,000 limit on home equity deductibility.

(Q1) First off, did we write off too much?
(Q2) Secondly, at what point does the lot become viewed as investment property, ineligible for home equity deductibility?

Now in June 2009, we are trying to sell the lot, on which we expect to take at $25,000 loss.

(Q3) What are the tax implications here?
(Q4) What about the interest I deducted already on what turned out not to be a primary residence?

Thanks for your advice.

Hi Jim,

Thank you for your question.

According to the IRS Publication 530, “Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). However, your deduction may be limited if:

1) Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or

2) You took out a mortgage for reasons other than to buy, build, or improve your home.

In addition, IRS Publication 936, says that you can deduct home equity line of credit interest limited to $100,000 if it is used for investment.

So, to answer your questions (Q1) and (Q2): I believe you can only deduct up to 100,000 of the loan interest as investment interest on Schedule A.

(Q3) Your 25,000 loss may be limited to a 3,000 deduction each year.

(Q4) When you sale the lot at a loss, there shouldn’t be any impact with regards to the interest already deducted.

Thanks again for your contribution.

Education Expenses

My daughter started college last fall (2010) at a four year state university, we live in Florida. My husband and I bought the Florida Prepaid College (529) and we received a 1099-G from them showing the dispersement, basis, and earnings. We received a 1098-T from her university only showing box 2 (qualified tuition) and her Florida Bright Futures scholarship amount of $2,000. Here is the issue, the amount in box 2 is just a small portion (a little more than $500) of her tuition, the other $1600+ was paid through Florida Prepaid College Fund, the state ran 529.

The University deducted fees and books and whatever else and refunded our daughter the rest of the Bright Futures, some $900+.

First of all, how do I take the deduction or credit for learning or whatever for the dispersement from the Florida Prepaid when the university is not reporting it?

Secondly, is tax due on the portion of the Bright Future’s that was refunded to her because we had a 529 for her tuition? If the taxes are due, whose return do they go on, ours or hers. She is our dependent, she lived with use until January of this year (2011) and we support her (pay her car and insurance, medical insurance, clothes, food, etc., this semester for the first time she got some student loan funds, but not in 2010). She also earned money last year, some $9500 and is filing a tax return.

Also, I was advised that she does not need to report the 1099-G on her tax return as no taxes are due on the earnings because the entire dispersement was used for tuition. Is this true?

Thank you for your help.

Fees on Airline and Phone Bills

Can the fees included on the tax for airline tickets, car rentals, and phone bill be included as itemized deductions.

Yes, typically the fees included on the tax for airline tickets, car rentals and phone bills would be included in your unreimbursed employee deductions on your Schedule A itemized deductions.