First things first with 'primary' homes

Friday, May 9, 2008 at 3:12am

Q: I have two primary homes but would like to buy another. A friend wants to live in one of my primary homes and pay me rent.

My question is: How do I structure this in order to deduct taxes/interest on all three homes? I was thinking setting up a sole-proprietorship on my current home that’s to be leased out to my friend. Also, if the homeowner’s association does not allow tenants, can I get in trouble by law if I rent the property out?

A: No one can have two “primary” homes. The word “primary” means first. The home in which you live most of the time, is considered your primary residence. The other house you own is your second home, or perhaps a vacation home.

The IRS currently permits you to deduct the interest you pay on up to $1 million in mortgages and $100,000 in home equity loans on your primary and secondary residence. There are additional restrictions on these limits and these amounts are for married couples. Likewise, real estate taxes paid on a primary and secondary residence are generally deductible.

So, now you want to buy a third “primary” home. There is no provision in the IRS code for deducting the interest and taxes on a third “primary” residence. In fact, it sounds like you are about to start being an investor in real estate. If your friend starts to pay you rent, you can claim that property as an investment property. You’ll be able to write off the expenses of owning the property (mortgage interest, insurance, taxes, maintenance, etc. along with other investment benefits) against the income you receive from your tenant.

The problem you may run into is with your homeowner’s association. If the HOA does not allow rentals, and you rent out your home, you run the risk of being fined by the HOA, or worse. They could sue you for violating HOA rules. You don’t want to go there.

What I recommend you do is sit down with a knowledgeable real estate attorney who can discuss these issues with you in detail and provide some sort of workable structure for what you’re trying to do. For more details on tax deductions, please go to and read Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense. You may also find Publication 530, Tax Information for First-Time Homeowners of interest as well.

Q: We are looking to consolidate our debt. Our mortgage lender turned us down for a home equity line of credit. What are our other options? We have only been in our home for one and a half years, so there is not much equity.

And we have tried approval for other loans from the same lender and been denied. Should we try other lenders?

A: No. You’re done for the moment. Every time you apply for credit and are denied, you hurt your credit history and your credit score goes down. The lower your credit score, the less likely you will be approved by another lender.

If you’ve been turned down for a loan, you’re entitled to see a copy of your credit history and credit score to find out why they’ve turned you down. In your case, however, it sounds as though you’re trying to get blood from a stone.

If you don’t have any equity in your property, you cannot refinance in order to consolidate debt. Mortgage lenders are getting picky about how much cash you can borrow against your equity. These days, they’re not doing 100 percent loans, or anywhere close to that. If you’re in a declining market, where home prices are falling, they might not refinance you if you have less than 5 or even 10 percent equity in your home.

Since you’re out of refinancing options for the time being, if you want to get your debt under control, you’ll have to do it the old-fashioned way: stop spending and find a way to bring in more income each month, even if it means taking a second or third job.

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Filed under: City Business
By: bnakat on 12/31/69 at 6:00

Thank you NCP for providing a knowledgeable source for financial questions. The two "primary" homes question brought me to this site. While from my understanding of the tax code, such was not allowed, it is quite useful to have such a resource as this to verify ,or refute.Opinions are plentiful throughout your publication, and they too have have their place. Prolific sounding boards are one example.During economic down-turns, regardless of characterization, more "ordinary" folks require sound financial counseling. Your professional(s) can only recommend such for many with extensive needs. Still, answers to pinpointed questions can be beneficial.