Legal Question in Tax Law in North Carolina

2005, 2006 mortgage interest deductions

during 2005 and half of 2006 we owned two homes. One in CA and one in NC. The mortgages for the two homes added up to 1.2 million (our CA home was in Marin county $$) We had our tax preparers in both CA and NC work on our tax return together to make sure all of our information was accounted for. We're now being audited and have subsequently found out that our mortgage interest was not deductable, or at least not the whole amount. I made 250,000 in 2005 and paid full taxes throughout the year. The IRS is now telling my that for 2005 I owe them $25,000 plus a fine of $5,000. I truly don't understand this. I thought interest deductions lowered your taxable income amount and then you paid taxes on that. There is no way going over the cumulative mort. limit by 200,000 could amount to that much tax that I ''didn't'' pay and owe them. So, my question is can I deduct all the interest based on the percentage that my loans were under $1m i.e.: only for the amount up to $1m? Or do I disqualify for deducting any/all interest because I was $200k over? I'm working with my accountants (CA and NC) right now to resolve this issue. The IRS is sending my letters with huge amounts that I owe them which scares us. Thanks for the opinion on this.

1 Answer from Attorneys

Related Questions & Answers

More Tax and Taxation Law questions and answers in North Carolina

Looking for something else?