Ignoring The Tax Code
MF101 ignores the realities of the Internal Revenue Code (IRC).
Readers will unfortunately take from MF101 that the interest on the loan when borrowing money from a personal residence to fund the preferred wealth building tool (cash value life insurance) is deductible. That is NOT TRUE the vast majority of the time. Obviously, when you can borrow money, write off on the loan and reposition the borrowed funds into a tax-free wealth building tool, the decision to move forward is much easier. Whether an oversight made out of the ignorance of the author or an intentional deception of the reader; this flaw is significant.
MF101 is very clever in that many examples in the book have clients selling their home and using the proceeds from the sale to fund the cash value life insurance. Why is that the case? Once you understand how the IRC deals with home equity debt (removing equity from a home vs. home acquisition debt which is debt from the purchase of a new home) you will know why.
There are two code sections you need to understand in order to determine if home equity or acquisition debt on a home is tax deductible. Titles 26 Section 163 and 264(a).
Section 163 sets the deduction limit at $1,000,000 for home acquisition debt (if married and $500,000 if single). For home equity debt, the limit is $100,000 of new debt (up to the FMV of the home).
Therefore, if you remove equity from an existing home to build wealth through a cash value life insurance policy, the interest deduction on the loan is limited to $100,000 of new debt.
That sounds great right? You can borrow $100,000 from your home, reposition it in a wealth building tool that will allow the money to grow tax free and be removed tax free in retirement. Right? Wrong.
Section 264(a)3 states that if you borrow money to reposition into a cash value life insurance policy with contemplation of borrowing from it (classed Equity Harvesting), NONE of the interest is deductible. (There are exceptions to 264(a)3, but they are narrow and are not discussed at all in MF101. These exceptions are discussed in great detail in The Home Equity Management Guidebook).
When reading a book that is based on borrowing money from a home and repositioning it into a cash value life insurance policy, donít you think 264(a) should be covered in great detail?
It's one thing not to deal with it in a book; it's another to create an example that leads the reader to think incorrectly that interest on home equity debt is deductible. That's what MF101 does starting on page 158. On page 156, MF101 has an example where the client separates $160,000 of equity from his home to reposition into cash value life insurance.
On page 156 MF101 states "After deducting the $160,000 mortgage balance……"
On page 157 MF101 states "In this example, the monthly mortgage payment was $1,000, which equals $12,000 per year. In the 33.3% tax bracket, the net after tax cost of the mortgage would be $8,000."