Helen Oliveri

The recent drop in interest rates has prompted millions of households to refinance their mortgages. Borrowers who refinance need to familiarize themselves with tricky tax rules on what is or is not deductible for interest payments. Here are some reminders on how the rules work.

Question: I own a personal residence. It is worth more than the remaining principal balance on the mortgage. My lender is willing to allow me to refinance for more than the balance of the existing mortgage. I know that the tax rules allow me to deduct interest payments on a refinancing loan as long as it is for the same amount as the existing balance. But am I also entitled to deduct interest payments for the part of the refinancing that exceeds the existing balance? And does it matter that I plan to use most of the excess refinancing proceeds to pay off credit card debts?

Answer: Whether borrowers are entitled to deduct interest on the excess amount depends upon how they use the proceeds from the refinancing and the amount of the proceeds. When borrowers use the amount in excess of the existing mortgage to buy, build or substantially improve principal residences, meaning year-round dwellings, or second homes such as vacation retreats their interest payments come under the rules for home acquisition loans. Those rules allow them to deduct the entire interest as long as the excess plus all other home acquisition loans do not exceed $1,000,000, dropping to $500,000 for married couples filing separate returns.

When borrowers use the excess for any other purposes, another set of rules prohibits deductions for payments of interest on “consumer loans.” This wide-ranging category includes credit card bills, auto loans, medical expenses and other personal debts such as overdue federal and state income taxes. There is, though, a limited exception for interest on student loans, one of those “above-the-line” subtractions to arrive at adjusted gross income, the amount on the last line of the first page of the 1040 form.

But most borrowers are able to sidestep these restrictions on deductions for consumer interest, thanks to the rules for home equity loans. Those rules allow them to deduct the entire interest as long as the amount in excess of the existing mortgage plus all other home equity loans do not exceed $100,000, dropping to $50,000 for married couples filing separate returns. It makes no difference how borrowers use the proceeds.

When their refinanced loans are partly home acquisition loans and partly home equity loans, there is an overall limit of $1,100,000 to $1,000,000 home acquisition debt and $100,000 home equity debt, dropping to $550,000 for married couples filing separately.

When the loans exceed the ceiling of $1,000,000 for home acquisition loans and $100,000 for home equity loans, the excess generally is categorized as nondeductible personal interest. The general disallowance is subject to exceptions for loan proceeds used for business or investment purposes.

Yet another restriction applies to the steadily growing number of borrowers burdened by the AMT (alternative minimum tax). The AMT allows deductions for interest payments on home acquisition loans of up to $1,000,000. But AMT rules deny any deductions for interest on home equity loans for first or second homes, unless the loan proceeds are used to buy, build, or substantially improve the dwellings — one reason why advertisements for home equity loans frequently finesse the troublesome question of tax deductibility.

J. Block

If you're a commercial property investor looking toward 2010, where are the most promising real estate markets in the U.S.?

The Urban Land Institute teamed with consulting firm Pricewaterhouse Coopers and asked more than 900 investors, developers and lenders that question recently, and came up with some intriguing answers.

The top market for heads-up investors among literally hundreds around the country turns out to be Washington D.C.

The nation's capital, where you send your tax money and where your federal government continues to grow, turns out to be the only truly "recession proof" market in the U.S., according to the real estate experts polled in the study.

Why? Because Washington thrives when the economy falls apart, thrives when the country is at war, and does really well when the political party in power believes in big government, more agencies and more federal spending.

And that's precisely where we are right now.

"While hard pressed lenders pull back in most cities," according to the Urban Land Institute's summary of the study, in Washington "major insurers and banks have taken a long term view and are actively providing financing for new (commercial real estate) deals. "

No shortage of equity or debt for the right project -- if it's in D.C.

And it's not just the city itself that's prospering. The Virginia and Maryland suburbs are adding high tech, defense and scientific jobs by the thousands.

According to the study, "Bethesda (Maryland), home to the National Institutes of Health, should benefit from increased biomedical (federal) spending," and the close-in Virginia suburbs are expected to grow defense-related jobs and new construction as well.

Ranking number two after Washington for commercial property investment in 2010 is San Francisco, with especially good prospects for apartments, warehouses, offices and hotels. Metropolitan San Francisco not only is a tourist and convention magnet, but combines strong center-city employment with the high-tech industry in suburban Silicon Valley.

The third rated top investment prospect in the survey might be a surprise to some: Austin, Texas, with lots of technology businesses growing and needing more space. The survey ranked it near the top because of the city's pro-business political climate and low taxes, both of which should, it said, "contribute to future growth and continuing corporate relocations. Austin fits the "brainpower" model that attracts investment even when the national economy is soft.

Rounding out the top ten hot spots for commercial and income-property investors for the coming year, by rank: Boston, New York, Houston, Seattle, Raleigh/Durham North Carolina, Denver and San Jose, California.

K. Harney

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.91 percent with an average 0.7 point for the week ending November 12, 2009, down from last week when it averaged 4.98 percent. Last year at this time, the 30-year FRM averaged 6.14 percent.

The 15-year FRM this week averaged 4.36 percent with an average 0.6 point, down from last week when it averaged 4.40 percent. A year ago at this time, the 15-year FRM averaged 5.81 percent.

The five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.29 percent this week, with an average 0.6 point, down from last week when it averaged 4.35 percent. A year ago, the 5-year ARM averaged 5.98 percent.

The one-year Treasury-indexed ARM averaged 4.46 percent this week with an average 0.6 point, down from last week when it averaged 4.47 percent. At this time last year, the 1-year ARM averaged 5.33 percent.

"Mortgage rates eased further over the week, helping to promote an affordable home-purchase market and stimulate refinance," said Frank Nothaft, Freddie Mac vice president and chief economist. "This comes at a time when house price declines are moderating and consumer demand for prime mortgages at commercial banks has picked up."

"The National Association of Realtors® reported that national median sales price of existing homes fell 11.2 percent in the third quarter relative to the same period last year. Moreover, almost 20 percent of the top metropolitan areas experienced positive annual growth, compared to only about 12 percent in the first quarter of this year."

Members of the International Code Council's Residential Building Code Committee (RBCC) have made it clear that fire sprinklers are destined to become a standard feature in all new homes. The fire sprinkler requirement was added to the International Residential Code (IRC) last year, and it is scheduled to become effective January 1, 2011, in states that adopt the latest version of this code. Currently, 48 states use the IRC as a basis of regulating residential construction, although some states lag behind in adopting updates.

At a hearing held earlier this week, the National Association of Home Builders (NAHB) had petitioned the International Code Council (ICC), which publishes the IRC, to repeal the fire sprinkler requirement, but the RBCC rejected that request by a vote of 7 to 4.

"This vote is significant in two ways," said Chief Ronny J. Coleman, president of the IRC Fire Sprinkler Coalition and former fire marshal for the state of California. "Not only did the RBCC reject the homebuilders' request to repeal the sprinkler requirement, but if you look at the vote, every member of the committee, other than the four who are appointed by NAHB, voted to uphold the fire sprinkler requirement." Following the committee vote, NAHB attempted to use a new procedure in the ICC process that allows members assembled at the hearing to overrule the committee decision, but the members made it clear that they were standing firm on protecting American families from fire. More than 1,000 ICC members in attendance voted overwhelmingly to affirm the RBCC's decision.

"ICC's message on this matter is pretty clear," said Jeffrey Shapiro, P.E., executive director of the IRC Fire Sprinkler Coalition. "Their membership has now supported the home fire sprinkler requirement at both the 2008 and 2009 annual hearings, and each of those votes passed by more than a two-thirds margin." Those decisions have now been further affirmed by the RBCC, which is a balanced, consensus committee that includes homebuilders, building and fire safety officials, architects and engineers.

"People who buy new homes that comply with the IRC fire sprinkler and smoke alarm requirements can sleep peacefully knowing that their families and their homes are protected from fire," said Meri-K Appy, president of the non-profit Home Safety Council.

While fire sprinklers provide a level of comfort, further prevention is sometimes necessary. Take for example the recent announcement from the Communications Cable and Connectivity Association, Inc. (CCCA) that warns of an increased risk of fire from offshore-manufactured communications cable products which fail to meet National Fire Protection Association (NFPA) minimum requirements for fire safety. It's a problem, the CCCA says, that continues to plague the industry and marketplace.

"As we witnessed last year, the failing products were made with inferior materials and designs to save on production costs and they predictably failed the minimum fire safety requirements," said CCCA Executive Director, Frank Peri, whose organization's test results showed that six of the eight samples failed to meet the minimum NFPA code requirements for low flame spread and/or smoke generation for installation in commercial buildings, schools and multi-tenant residences. "All of the failing samples exhibited catastrophic results, indicating an unacceptable public safety hazard still exists."

Cables selected for the tests were all procured from North American distributor's inventory between March and May 2009 and were comprised of riser and plenum rated Category 5e and Category 6 cables, which are the predominant cable types used for wired local area networks (LAN). Category 5e cables also are typically used for telephone interconnection within a building. These cables are commonly installed behind walls and in ceiling cavities, and are connected to wall outlets that have phone or Ethernet ports.

"The CCCA has taken the position that this serious problem will not go away until quality assurance procedures include testing of samples of finished cable procured directly from the marketplace. Our association is cooperating with the major independent telecommunications industry testing agencies to establish a stronger approach to assure compliance to safety standards," Peri added. "We are very encouraged that a major independent testing agency has informed our association that it plans to put in place new quality assurance measures which include testing of finished product procured directly from the marketplace."

P. Mosca

Congress's extension and expansion of the $8,000 tax credit through next June 30 should take the pressure off first time home buyers who've been rushing to close deals before the November 30 deadline.

That deadline is now gone. Everybody's got until next June 30 to settle on their purchases.

But here's something in the expanded program that hasn't gotten much attention: The new $6,500 federal tax credit for so-called "move up" buyers took effect immediately upon enactment.

That means that potentially hundreds of thousands of Americans who fit the key ownership and income criteria for the new credit are eligible for it … right now.

What are those tests?

Number one: You have to have owned and used your current home as your principal residence for five consecutive years out the past eight;

Number two: Your adjusted household annual income cannot exceed $125,000 if you file taxes as a single, or $225,000 if you are married filing jointly.

To qualify, you've got to sign a contract to purchase a replacement residence before next April 30, and go to closing on it by June 30, 2010.

That's potentially huge for all sorts of people who never thought of themselves as qualifying for a tax credit under any circumstances, because they've owned a home for years.

Here are some other useful facts about the revised credit program:

* Although the $6,500 feature has been labeled the "move up” credit, there is nothing in the law forcing anybody to buy a bigger or costlier house. You can downsize or upsize and still get the credit.

For example, one Treasury investigation found 500 claims for the credit were submitted by kids under four years of age!

Other audits have documented violations of rules against purchases of homes from relatives, and the requirement that purchasers must not have owned a principal residence any time during the preceding three years.

In other cases, investigators found that no purchase had taken place! The whole thing was a fraud.

This time around, the IRS plans to evaluate credit claims much closely, up front.

K. Harney