It May Be Legal to Use a Home Mortgage to Pay Off an Auto Loan, but Should You?

Q: I will soon be purchasing a home. I would like to consolidate a $20,000 auto loan with the mortgage loan. In doing this I would be, in essence, writing off the interest as a mortgage even though money from the loan had been used to purchase a car. Is this legal?

--W.K.

A: Taxpayers are allowed to deduct the interest on mortgages of up to $1 million for the purchase, construction or improvement of a principal or second home. They are also allowed to deduct the interest on home equity loans of up to $100,000 regardless of how that money is used. Assuming that you would not exceed the $100,000 limit, the law would allow you to deduct the interest you pay on a home equity loan whose proceeds were used to purchase a car.

Now that we’ve established that the general concept of using a home loan to pay off your car loan is technically legal, let’s examine whether it’s practical. Depending on the amount of money you have for a down payment on your house and your lender’s loan practices, you may find that your lender is unwilling to give you additional money on a home purchase loan to cover paying off your auto loan. Your alternative may be to seek a home equity mortgage, which typically carries a higher interest rate than a regular home loan.

Despite the higher rate, this course would make economic sense because you would be taking advantage of virtually the only deductible loan remaining for the average taxpayer. Further, home equity loans often carry lower interest rates than do many auto loans made by credit unions, banks and auto finance companies.

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Q: In a recent column, you said the taxable basis of stock left to an heir is generally set as of the donor’s date of death. Would this also apply to U.S. Savings Bonds? My sister and I have inherited some from our mother and don’t know how we should treat this income.

--M.G.

A: No. Although the government allows a step-up in basis for such assets as real estate, stocks and collectibles, it does not afford the same treatment to what are called ordinary income assets.

These include IRAs, pensions, installment sale notes, annuities, U.S. Treasury securities and savings bonds.

The reason for treating these assets differently than real estate, stocks and the like, say our experts, is that the deceased taxpayer had elected to defer taxation on these ordinary income assets by putting money into these investments.

Just because the taxpayer wants to defer taxes on investments doesn’t mean Uncle Sam is willing to forgive the tax bill.

That said, however, it may be possible for the bonds’ appreciation to be declared as taxable income on the final tax return of your mother. If your mother had little or no income during her final year, the tax would be minimal or nothing at all. In that case, the tax basis of the bond would be reset as of your getting it. Whoever is filing your mother’s final tax return should be able to assist you.

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Q: Can a retired person open a Roth individual retirement account, or must one have earned income to open one?

--H.T.

A: To open an IRA of any kind, Roth or traditional, you must have earned income. Individuals are permitted to contribute up to $2,000 a year to an IRA of either type, assuming you meet the age qualification. You may not contribute to a traditional IRA after turning age 70 1/2, even if you have earned income. If you’re older than 70 1/2 and still working, you may contribute to a Roth IRA.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail carla.lazzareschi@latimes.com