Suppose someone is generally subject to the alternative minimum tax and owns a home with no mortgage. They would like to take out a mortgage on their house and invest it elsewhere at a higher rate. Suppose they were to borrow $300K at 5% and invest it at 7% - they would pay $15K in interest, and earn $21K, for $6K profit. Question is whether they pay AMT on the $6K or on the entire $21K, IOW whether the $15K is deductible for AMT purposes.
ISTM there are two possible deductions, home mortgage and investment interest expense. I’m wondering if either of these apply.
Home mortgage are deductible for AMT if they are “eligible”. The instructions for AMT say (Line 4):
This does not apply in this case.
Investment interest expense is deductible for AMT purposes. However, the investment interest expense Form 4952 says:
So it doesn’t seem to fit here either.
The result seems counterintuitive, but that’s the way taxes are, sometimes, and maybe an ineligible home mortgage used for investment doesn’t qualify on either end. Unless home mortgage is only not included if it’s used to buy, build etc.
In sum, is there a way to deduct the $15K, or is this idea not viable?
As far as I can tell, the rules about deductibility are the same whether you’re subject to AMT or not (for these limited set of deductions).
The interest is definitely not deductible under the usual rules for home mortgage interest - it was not used to obtain or improve the home. (This doesn’t stop lots of investment advisors from giving the wrong advice, however.)
On the investment interest side, the tax code (IRC Sec 163 if you want to look it up) uses the same definition of eligible residence interest in both places. In other words, if something is eligible to be deducted as home mortgage interest, it is not deductible as investment interest, but non-eligible mortgages are not automatically disqualified from a deduction as investment interest. But I wouldn’t be comfortable giving even an anonymous Internet opinion on that without knowing how the proceeds were used and without checking for IRS Regs/Rulings or Tax Court rulings.
I would really recommend talking with a tax professional (CPA or EA) who can give you a solid opinion. This opinion is not only so that you know you’re doing it the right way - it’s so that you can show it to the IRS. Even if the IRS disagrees with the tax position under audit, you can avoid penalties by showing reliance on a professional opinion.
You may find the answers you need in IRS Publication 550. (Warning: PDF) It looks to me like the ineligible “home mortgage interest” refers to qualified home mortgage interest, and not not the sort of speculative home equity loan you’re looking at. But I’m far from being a tax expert.
I’ve not spoken to any qualified CPAs, but I did speak to a relative who was formerly a (corporate) tax accountant, and he also felt that it would qualify as an investment interest expense, and has filed his own taxes this way.
Slightly OT, but I thought the IRS clamped down on this by putting onerous requirements on anyone who issues these types of opinions (hence the proliferation of “IRS 230” disclaimers).
I guess the degree to which someone thinks its onerous depends on how much extra they want to charge the client.
But more seriously, there have been significant changes to due diligence requirements, “more likely than not” standads, disclosing of uncertain tax positions and many more areas in the last couple of years. It’s enough that you have to be careful about an off-the-cuff response, but (for relatively simple questions like this) it isn’t such a burden if you have a good tax research tool at hand and can do a little digging.
