Tax Accounting Question (Prospective Changes vs Amending Prior Returns)

In My Humble Opinion
1

Here’s the specific question (though I imagine it would have broader application):

Suppose you took out a mortgage on your house in order to fund certain investments. Now, the rules on mortgage deductions is that they’re generally fully deductible if used to purchase or remodel, but not otherwise. However you can deduct interest on up to $100K as a home equity loan. Instead of doing that, you decided to treat the entire amount as a investment interest expense, to be used to offset the profits from the investments.

Unfortunately, it turns out that the applicability of the investment interest expense deduction is pretty narrow, and there are all sorts of profits that it does not apply to, so you’ve been carrying forward much of this expense from year to year without being able to apply it. In theory, you could (I assume) amend the prior returns to change $100K of this loan to be home equity and the rest to be investment interest expense. But you’re not interested in redoing and refiling 3 years of taxes. So the questions are:

[ol]
[li]Can you change the treatment prospectively?[/li][li]If not, and you do it anyway and then get audited, can you just say “OK, that wasn’t proper but now that you’re making a big deal of it I’m just going to amend my prior tax submissions, and not only make this year’s return OK but get bigger refunds for prior years as well”?[/li][/ol]

2

A lot of views but no responses.

For those interested, my father put this question (and some others) to a big accounting guru that he knows. He said the answer to the first question is that you can change prospectively. However you cannot file amended returns with this change to prior years.

3

I don’t see anything in the fact pattern that would prevent filing amended returns for up to 3 years.

  1. Yes
  2. n/a because 1 is Yes.