Drew Asks:
I have a question in regards to adding back home mortgage interest paid to personal cash flow (Schedule A – line 8a of 2019 1040). A few years ago, I attended a class that covered how to calculate personal cash flow. The teacher stated that it was acceptable to include Home mortgage interest paid in personal cash flow calculations. I cannot remember the reasoning for adding mortgage interest back.
Could you provide some insight on why this would be applicable? If this is not accurate, please provide some guidance on why it would not be.
Linda Says:
It is accurate that you do not want to count mortgage interest against the borrower’s cash flow if you are going to count their house payment against them as debt service. You would be hitting them twice for the same thing, home mortgage interest.
That said, only add it back if you have counted it against their cashflow. Do you subtract all Schedule A expenses against borrower cash flow? If so, add back the home mortgage interest.
But if you do not subtract itemized deductions, you do not need to add it back. In my experience, most lenders are not using Schedule A items against the borrower cashflow.
What about home office mortgage interest?
This does come into play, however, with the home office deduction on 1040 Schedule C. We add it back if you start with Schedule C bottom line because it is primarily home mortgage interest. Again, we do not want to double count.
What else from Schedule A?
I rarely use Schedule A as a source for income or expense adjustments. And now that the standard deduction has been increased significantly, you get the Schedule A less often.
AgLenders and some business lenders need a ‘family living’ adjustment in order to calculate the global cashflow of an entity and the owner’s. If so, a glance at the Schedule a may show elevated medical expenses or high levels of charitable contributions. A lender may attribute a higher family living amount in that case.
