Freedom Asset Manager Tax Benefits

Reyes Capital Group provides the following tax information to assist our clients in discussions with their tax advisors and to help our clients develop a general understanding of the inherent tax benefits of their Freedom Asset Manager mortgage. This information is not offered as tax guidance or advice on any individual’s tax situation; it is only offered to provide perspective when discussing these issues with a tax advisor. You should always consult your tax advisor for advice regarding your own specific situation. You may also refer to IRS Publication 936 for additional guidance regarding the deductibility of mortgage interest.

1. The Freedom Asset Manager (FAM) follows the same rules for deductibility as other loans. A couple, married filing jointly, may be able to deduct interest on up to $1 million in acquisition debt (i.e., the amount borrowed to acquire or improve your home), and on up to $100,000 in home equity debt (not used for acquisition or improvement).

2. The amount deductible in 2007 would generally be computed by looking at the total interest paid on the FAM, per the 1098 statement, and reducing this figure by the amount of interest paid each month on any home equity draws in excess of $100,000. See the following example.

3. Keep in mind that if your loan is a refinance (i.e., not a purchase), then your initial acquisition debt will be the amount needed to pay off the old loan minus any existing home equity debt that is paid off as part of the refinance to the new loan. In other words, once acquisition debt is retired, you cannot increase it by refinancing – only by improving your home, or by selling and purchasing another home with a larger loan. This is true for any loan, not just the FAM.

4. If you are subject to the AMT (Alternative Minimum Tax), your home equity draws are not tax deductible as part of the AMT calculation. Again, this is true for any loan, not just the FAM.

5. Points paid on loans as part of a purchase transaction are deductible in the current tax year. Points paid as part of a refinance to a FAM are deductible, but must be amortized over the life of the loan. Points paid as part of a refinance with the same lender are not deductible. As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. See IRS Pub. 936 for more details.

6. Points paid on a modification to the FAM (i.e., buying down the margin after funding) are deductible, but must be amortized over the life of the loan. These points are not reported on the 1098. Clients should save and present the modification paperwork as documentation.

7. The limits on deductible interest apply to your primary home and up to one second home, in total. However, interest paid on proceeds from a loan on one home which is then used to purchase another home (i.e., a second home) is not deductible – interest is only deductible when associated with a loan secured by the same qualified (see Pub. 936) home. If loan proceeds are used as part of a business (i.e., a rental property), they may be deductible as a business expense when doing taxes for that business; consult your CPA and/or tax advisor. This applies to all loans, not just the FAM.

8. Like most itemized deductions, the home mortgage interest deduction is subject to the itemized deduction phase-out. If your AGI exceeds $156,400 (married, filing jointly), your deductions will begin to be slowly disallowed. For high-income individuals, this means that using a FAM to generate incremental interest savings can be very advantageous.