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Home Equity Management Guidebook

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Ignoring The Tax Code


     2) SSOYA ignores the realities of the Internal Revenue Code (IRC). Readers will unfortunately take from SSOYA that the interest on the loan when borrowing money from a personal residence to fund the "S.A.F.E.T.Y. Fund™" is deductible. That is NOT TRUE the vast majority of the time. Obviously, when you can borrow money, write off the interest on the loan and reposition the borrowed funds into a tax-free wealth building tool, the decision to move forward is much easier. Whether an oversight made out of the ignorance of the author or an intentional deception of the reader; this flaw a significant. To read more about this significant oversight and a specific example with violates the tax code, please click here.

     SSOYA is very clever in that nearly every example in the book has clients selling their home and using the proceeds from the sale to fund the "S.A.F.E.T.Y. Fund™." Why is that the case? Once you understand how the IRC deals with home equity debt (removing equity from a home vs. home acquisition debt which is debt from the purchase of a new home) you will know why.

     There are two code sections you need to understand in order to determine if home equity or acquisition debt on a home is tax deductible. Titles 26 Section 163 and 264(a).

     Section 163 sets the deduction limit at $1,000,000 for home acquisition debt (if married and $500,000 if single). For home equity debt, the limit is $100,000 of new debt (up to the FMV of the home).

     Therefore, if you remove equity from an existing home to build wealth through a "S.A.F.E.T.Y. Fund™", the interest deduction on the loan is limited to $100,000 of new debt.

     That sounds great right? You can borrow $100,000 from your home, reposition it in the "S.A.F.E.T.Y. Fund™" where it will grow tax free and can be removed tax free in retirement. Right? Wrong.

     Section 264(a)3 states that if you borrow money to reposition into a cash value life insurance policy with contemplation of borrowing from it (i.e. the "S.A.F.E.T.Y. Fund™"), NONE of the interest is deductible. (There are exceptions to 264(a)3, but they are narrow and are not discussed at all in SSOYA. They are discussed in great detail in The Home Equity Management Guidebook).

     When reading a book that is based on borrowing money from a home and repositioning it into a "S.A.F.E.T.Y. Fund™", donít you think 264(a) should be covered in great detail?

     Itís one thing not to deal with it in a book; itís another to deal create an example that leads the reader to think incorrectly that interest on home equity debt is deductible. Thatís what SSOYA does starting on page 73. On page 73 and the following pages, SSOYA has an example where the client does a cash out refinance of $100,000 and letís the money grow tax free in a "S.A.F.E.T.Y. Fund™" (a cash value life insurance policy).

     There is no mention of 264(a)3 which would make the interest on the $100,000 cash-out refinance non-deductible. On page 77 SSOYA states that the tax deductibility of the interest paid is simply icing on the cake.

     On page 75 there is an example of someone with a $10,000 mortgage payment who is in the 33% income tax bracket. SSOYA states on page 75 that the actual cost to the client is $6,667 due to the ability to deduct the interest. This example which does not specify whether the debt is home equity debt or home acquisition debt and its close proximity to the example on page 73, which is a home equity loan example, could lead readers to believe the interest on home equity debt is deductible (when it is not under 264(a)3.

     Summary on the lack of detail on the deduction of interest when removing equity from a home to build wealth:

     By not dealing with 264(a)3, the author of SSOYA proves that she either doesnít know the code section exists or that she does and chose not to disclose it to readers. Both conclusions are bad for the reader as they are lulled into the belief that home equity debt is deductible when funding the "S.A.F.E.T.Y. Fund™."